Report: Catalytic First-Loss Capital
The Community Finance Fund for Social Entrepreneurs (CFFSE) provides financial services for low-income populations in Australia.
Australian Government’s Social Enterprise Development and Investment Fund (SEDIF).
Christian Super, a not-for-profit superannuation fund based in Sydney, Australia.
AUD 4.5 million (or 37.5 percent of the total fund), provided as a grant.
The initial 37.5 percent capital protection is designed to diminish over time as more limited partners invest in the fund. In the first year, the CFLC will cover both interest and principal payments on any loan losses. After that it will cover only the principal component in any losses. If any of the CFLC pool still exists after 30 years, the fund manager can use this money at its discretion.
Because this was a pioneering impact investment deal in Australia, both parties wanted to ensure the deal set a good example in terms of providing financial returns and social impact. The SEDIF grant improved the fund manager’s balance sheet, reducing the pressure to hunt for very high returns. From Christian Super’s perspective, the CFLC not only brought the opportunity in line with acceptable risk-return parameters, but SEDIF’s participation also brought some sector expertise, as the latter has been active in the field for some time.
Christian Super had done due diligence on the fund manager a few years prior on a similar proposal, but without the CFLC component. Ultimately they decided not to fund them because, though they were achieving positive social outcomes, they were financially not as robust. When the fund manager again approached them with the SEDIF grant program, which was specifically created to catalyze commercial capital toward addressing social issues, Christian Super worked with the two parties to create this transaction. To settle on the ratio of CFLC to its capital, Christian Super began by setting its target floor return and worked backwards to arrive at how much first-loss would be needed to feel secure and meet fiduciary requirements.
| INVESTEE DETAILS | |
| Fund Manager | Foresters Community Finance |
| Inception Year | 2011 |
| Geographic Focus | Australia |
| Impact Focus | Provide investors with exposure to a diversified finance portfolio devoted to the social enterprise sector |
| AUM | AUD 12 million (USD 12.35 million) |
| Fund Capitalization | Grant and equity |
| Investment Period | Open |
| Investment Size | Varies |
| Target Return | RBA Cash Rate + 1.5% |
| Management Fees | 1.4% fee, 0% carry |
| INVESTMENT APPROACH | |
| Investment Instruments | Loans |
| Investment Period | 3-5 years |
| Investment Size | Minimum AUD 20,000 (USD 20,700) |
| Track Record | AUD 2 million loaned across three transactions, as of the 14th August |
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