Valuing investors

In recent years the idea of investing for social good as well as for financial return has moved from the periphery to the core of mainstream financial institutions. Wealth managers now report being asked by charitable foundations and high net worth clients to construct portfolios which include investments offering ‘blended returns’, i.e. returns that are social as well as financial. This increasing interest in socially motivated investment holds significant promise of additional financing for social and cultural organisations. It is a heartening development, a contrast with an environment of public funding cuts and general concern about the future prospects of public funding for the arts and culture.

Many high net worth individuals are interested in investing some of their wealth in the arts and culture. These individuals often have a passion for a particular artform or specific arts activities: they recognise the social and cultural value of the arts and how they create meaning and provide inspiration. It is the creativity of the sector and an interest in exploring the relationship between society, money and access to a fulfilling life that appeals as much as the financial return. This is not to imply that the financial return is not important, but to emphasise that it is not the only consideration.

We are describing here a new breed of investors. Many are likely to be attracted to commercially viable arts projects based on merchandising, education or commissions. They are investors, not philanthropists. An investment is not a grant: the money needs to be repaid and organisations that do not have a strong track record in financial management, appropriate governance and a clear business plan are unlikely to appeal no matter how persuasive their artistic plans, audience numbers or artistic reputation. This said, the key difference between blended value and commercial investors is that blended value investors are prepared to accept a lower financial return, adjusted for risk, than commercial investors. This is on the basis that the social and/or cultural value delivered provides compensation, and there is a process in place that enables this ‘impact return’ to the investor to be measured from one year to the next.

Often this new breed choose investment over philanthropy for particular reasons. They may be attracted to it because of its potential to address issues at a scale that philanthropy finds difficult (a good example is the way in which private funding for micro finance has enabled it to grow in a way that philanthropy alone could not have achieved). Their interest may stem from the fact that they see investment as a means of building the management and financial prowess of arts organisations and a means of increasing their capacity to generate more of their own income, thereby making them less dependent on public funding.

It is clear that arts and cultural organisations need access to capital in various forms(1). This capital can take the form of grants but grants are outside our scope here. Our interest, and that of the blended value investors, is in other forms of financing including loans, underwriting and revenue sharing arrangements. Arts and cultural organisations would benefit greatly from these other forms of financing. They need underwriting or lines of credit to smooth cash flow and/or deal with fluctuations in income. They need loans to support property development or refurbishment. They need loans and revenue sharing arrangements in order to develop new income-generating products and services.

MMM’s Capital Matters report(2) revealed that although many arts and cultural organisations are cash poor, many are asset rich. Some have buildings which might be used to generate additional income from conference or room hire. Most have highly skilled staff whose knowledge might be deployed to offer consultancy services or to develop income generating products or services (for example, putting existing offline products or services online). Many have large pools of members, supporters or volunteers, a good reputation and a strong brand – an excellent basis for additional income generation. Some have developed a range of partnerships and collaborations, including with private sector companies, which will help to increase their capacity to generate income from existing and new ventures. While there is significant potential for additional income to be generated, arts and cultural organisations often lack the small amounts of capital investment needed to unlock it.

The reverberating impact of the recession threatens the prospects for arts and cultural funding. Whilst private money cannot compensate for inadequate levels of public sector funding, the rise of socially motivated investing is a positive story in financial services and the opportunity is there for the arts sector to appeal more directly to these investors than hitherto, raising the capital that they need to change and adapt to the new financial environment and becoming more financially resilient as a result.