The London Early Years Foundation’s (LEYF) social purpose is to change the world one child at a time by providing access to high quality and affordable ‘Early Years’ education and care—especially to those most in need. In this guest blog, Samantha Creme, LEYF’s Director of Strategy & Business Development, discusses the launch of their recent charity bond and her perspectives on the impact investing landscape.
Last month, LEYF launched a £1.5m charity bond, which, if successful, will be our single largest social investment raised to date. These funds will support our ambition to grow our provision of high quality Early Years education and care from 4,000 to 10,000 children across Greater London. We particularly want to support those from disadvantaged backgrounds, as research shows that quality Early Years experiences can transform life chances for this group, who are too often left behind.
The bond is one of the first steps towards financing LEYF’s next phase of growth. We chose Triodos Bank as our partner for this initial charity bond launch, as our social purpose and approach are aligned and it is important that we work with like-minded partners who share our values. Getting to this point has been a multi-year journey—requiring alignment of ambition between our board of trustees and executive team, a robust business plan, a thorough understanding of the financing landscape, and, most importantly, a lot of teamwork to bring it all together in the 55-page bond offer.
The rise in impact investments in recent years, and the increase in traditional investors looking for returns that also meet sustainability criteria, presents new opportunities for ‘impact-first’ investments to be more creative in the range of financial products offered. These products can have transformative impact as they become more transparent, flexible, and affordable. And most importantly, this wider range of financing options should be accessible to social enterprises (as recommended by the Adebowale Commission) and especially charitable social enterprises (as I would suggest!).
Translating an ambitious strategy into an investment opportunity
Evidence shows that the first five years of a child’s life profoundly shape their future outcomes in terms of health and well-being, educational achievement, and career progression. This is especially true for those from disadvantaged backgrounds. LEYF’s nurseries are therefore disproportionately located in areas of London that can most benefit from access to high quality provision. Sadly, the need in London is growing—according to Ofsted data, children in deprived areas of London are three times less likely to access an ‘Outstanding’ nursery than their peers in the most affluent areas.
LEYF brings together the best of charity values and business operations to sustainably support these children and communities through our social enterprise model. We use surplus generated from a few of our nurseries in more affluent areas to cross-subsidise operations in the more deprived areas of London and maximise our social impact.
After the first six months of the pandemic, we could see that because of this sustainable social enterprise model—and the dedication of all our staff who provided outstanding care despite the challenges of the last two years—we would be in a strong position from which to scale our social impact even further.
Then came the real work of translating that ambition into an operational plan and financial model, communicating the strategy more widely across the organisation, and developing the financing strategy to deliver.
Finding the right financing partner
For us, the most important criteria when considering our financing options (beyond the obvious low rates and preferential terms) is flexibility.
The capital requirements in our financial model will primarily be used to acquire new nurseries. While we have modelled an expected growth trajectory, including how many new nurseries we take on each year and the estimated average purchase price and refurbishment capital expenditure for them, we do not yet know the specific opportunities that will arise that meet our own investment and social impact criteria.
Additionally, attractive opportunities move quickly in the nursery sector (where we’re up against 85% of operators that are ‘for-profit’). There is therefore a fine balance between having enough firepower to put forward a competitive offer for an opportunity, but not too much that we are unnecessarily paying interest and fees on the debt.
A financing partner who could support us to raise sizable funds when we were ready was therefore critical.
Good Finance has the most comprehensive list of social investors in the UK. However, the terms are shared at varying degrees of transparency (with Trust for London’s page being one of the most forthcoming). Understanding the true landscape therefore requires time to build relationships and to determine whether your organisation meets the eligibility requirements.
For us, working with the corporate finance team at Triodos Bank was the right first step because they offered us the flexibility we were looking for, are aligned with our social purpose (Triodos’ mission is to make money work for positive change), and are open access to a wide range of investors through their crowdfunding platform. Additionally, we could together agree the amount, term, and interest rate—balancing our needs with those of the investors to design a fair product. Another benefit of the charity bond is that ‘impact-first’ investors have the option to forego all or half the interest, so there is the potential that the average interest we pay is lower than the headline rate.
Exploring other impact investment options
Capital has the power to address unsolved problems in society. I believe we should be aiming for solutions that have ‘transformative impact’—that is sustainable, systemic, and scalable.
From a conservative perspective, we have assumed that almost all our financing will be through debt with terms roughly in line with the Triodos charity bond. However, there is a lot of potential—in terms of maximising our ‘transformative impact’—if we can raise philanthropic donations, or access even better financing terms. We could, for instance, support up to 20% more children in deprived areas of London, which is an additional 1,200 children and families.
Beyond the Good Finance list, there are also (an unknown number of) foundations that pursue a mixed approach to grant giving and social investment, balancing the delivery of social impact with financial return—and in some cases the long-term sustainability of their endowments.
Another example of preferable rates that we have secured is Postcode Innovation Trust’s Social Investment Programme, which offers a partial grant as part of their financing.
Even more revolutionary is the Greater Share Education Fund, an innovative philanthropic investment model that harnesses the expertise of the world’s top performing private equity funds and highest impact NGOs to transform education for children in under-served communities across the world. At LEYF, we’re thrilled to have been chosen as one of the eight global, high-impact education organisations. While the financial benefits are only likely to come in the years ahead, we will benefit much sooner from the expertise within the Greater Share community. It also means that any investment or donations in LEYF now will be highly leveraged, with further backing coming down the line, and will therefore maximise social impact returns.
At LEYF, we will therefore continue to explore a range of financing options to support our growth ambition and to build true partnerships with social investors and philanthropists who share our vision. We’re always on the lookout for like-minded partners who are passionate about tackling society’s inequalities, and supporting the education and social mobility of children, families, and communities.