Methodology
Methodology – asking about diversity
As we have developed more transparency around the data we collect and publish, we have become conscious that we need to take a more intentional approach to collecting more data on People and Place: where the organisations we fund are and who leads them. Our methodology of asking organisations about their diversity has been iterated several times of the last few months, in response to the ongoing conversations we are having with our partners, but also our intention to work towards re-establishing equality between investor and investee by changing power relations and funding structures.
The question we currently use is: Do you consider your organisation to be diversity led?
By diversity led we mean that either (i) 51% or above, of the board and senior management team are from diverse backgrounds: or (ii) organisations self-define as diverse-led based on who is making their key strategic decisions. By ‘making key decisions’ we mean that decisions on core strategic and financial matters are taken by a diverse group of decision-makers, not that consultation is undertaken as part of decisions that are subsequently taken by a group that is not diversity-led. These definitions are informed by research by the Arts Council.
Following feedback, we introduced an example to clarify any confusion around the question to help applicants answer it.
An example to help you to answer the following question is:
If you have 70% of your leadership team that identify as BAME, 60% that identify as women, 30% that have a disability and 20% that are LGBT, you would answer 'Yes' for BAME-Led and Woman-Led, then 'No' for Disability-Led and LGBT-Led.
We have now asked this in several programmes – CCLORS, RRLF, YEF, TISS, EDP. Generally, we found that answers are accurate. For example, the diversity answers in CCLORS first stage were generally confirmed in the second stage.
However, iterations and discussions with our partners continue. Following conversations with EDP partner Equally Ours, the EDP application form has a slightly different way of collecting this data. It remains comparable with our current data set, but with a slightly altered format with sub questions. This is just one test as we continue to explore ways to improve our data collection in this area.
Methodology – filtering the pipeline
There are various ways that SIB has prioritised filtering the pipeline in order to reduce the burden of applications on organisations that are not eligible for our funds and providing signposting to alternative funds and resources.
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Staggered Processes
We have been testing staggered application processes that prioritise objective information used for sifting, followed by more subjective assessments of a smaller group. The initial stage focuses on information needed to understand eligibility, as well as information that can help understand which organisations most closely match the fund’s key priorities. This data-led approach has helped reduce the application burden and help focus assessments in our emergency rounds. It can also be anonymised, which reduces the risk of familiarity bias in decision-making.
Ineligibility
Analysis is being carried out on the reasons why organisations may have been rejected for a fund. We are hoping a greater diversity in our community panel may also inform support gaps and what SIB’s role is in addressing them. This information will continue to feed into the direction of future funds.
Methodology: Return Metrics
Invest
As our Futurebuillders learnings demonstrated, social investment needs subsidy to be most effective. There were several methods we considered when deciding how to show the financial returns on the FBE loan portfolio. We slowly evolved our approach as the underlying data became more organised. The metrics we focused on were Holding Period Return (HPR), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR). The return figures were calculated on loans that were closed, by which we mean fully repaid or written off - as we can only fairly measure the performance of a loan once it has been closed.
Holding period return (HPR) is the simplest measure to use as it simply uses money received (loan repayments) vs money out (money lent out as loans) to show a total return percentage.
We next modelled IRR. IRR is the discount rate that makes the Net Present Value (NPV) of all future cash flows equal to zero. IRR shows the annual growth rate of a project. IRR is generally used to forecast a rate of return for a future project using future projected cash flows. However, IRR can also be used retrospectively. IRR is also used by a number of organisations in the social investment sector. For this reason, and due to Boston Consulting Group’s use of IRR in their 2015 report ‘A Tale of Two Funds’- we decided we would continue this ourselves. We faced two main problems:
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Our IRR figure looked very negative compared to other metrics due to the large negative cash flows in the first few years of the fund.
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IRR assumes incoming cash flows are reinvested when, in reality, the incoming cash flows were passed back to the government.
We resolved these issues by using MIRR.
The MIRR calculation method allows for a cost of financing rate and a reinvestment rate to be entered in the calculation. As none of the money received through the FBE loan portfolio was reinvested, the reinvestment rate in the calculation was set to zero. As the money came directly from government the cost of financing rate was also set to zero. MIRR also solves for occasions when IRR gives two separate values.
Ultimately the right return metric to use depends on the audience.
| Year | Percent Booking Close | Outgoings | Incomings | HPR | Annualized HPR | IRR | MIRR |
|---|---|---|---|---|---|---|---|
| 2015 | 38.98% | £74,430,877.42 | £45,139,868.94 | -39.35% | -4.44% | -12.46% | -6.01% |
| 2016 | 41.53% | £79,775,554.42 | £49,498,398.98 | -37.95% | -3.90% | -11.87% | -5.35% |
| 2017 | 50.85% | £92,619,607.41 | £61,595,042.23 | -33.50% | -3.09% | -9.61% | -4.19% |
| 2018 | 56.78% | £102,263,043.01 | £70,385,632.14 | -31.17% | -2.63% | -8.61% | -3.52% |
| 2019 | 58.47% | £105,571,298.61 | £72,880,737.33 | -30.97% | -2.44% | -8.31% | -3.30% |
| 2020 | 59.32% | £106,730,278.61 | £73,967,171.66 | -30.70% | -2.36% | -8.06% | -3.08% |
Key Findings
Key indicators of financial performance - such as Net Assets – all increased for 3-4 years after receiving Futurebuilders investment; ultimately reaching a new and higher plateau of around £500k in Years 4-7. This also shows that FBE investees are not high-growth businesses, like a Silicon Valley start-up comparator. Following investment from Futurebuilders, charities and social enterprises have also been shown to be more sustainable, with profit cycles showing as positive on balance.
Investee Growth: Net Assets
Methodology: MIRR
When calculating IRR we used four different costing methods:
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Loan IRR - this only includes loans that have finished (write-off, or paid off) as outgoings and incomings.
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Blended IRR - is the same as Loan IRR but it also includes any grants attached to those finished loans as outgoings.
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All Facilities IRR – builds on Blended IRR but also includes the pure grant deals as outgoings (any grants that had no loan portion on their offer).
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All w/ Mgmt Fee IRR - is the same as All Facilities IRR but also includes the management fee aid to SIB as an outgoing. This is the purest form of IRR as it accounts for all the costs in running the Futurebuilders Fund.
As can be seen by the graph below, as we close more of the portfolio, the IRR rises. This is largely due to more of the better performing loans being fully paid off and added to the calculation.
