For ten years, as part of our work to support stronger and greener local economies, Ecotrust Canada operated a loan fund – a bold and important early experiment in the field of social finance in Canada. We completed 87 mission-based loans over 10 years, dispersing $10.7 million in total loans, leveraging $40 million in additional loan capital, and creating almost 900 jobs in some of the most remote places in BC. Our 10 year experiment demonstrated that if we are serious about social enterprise and market innovation, we have to deploy capital in new ways.
Lesson Three: Consider your capacity
Our capital base was small and we were operating largely on borrowed money, which meant we were ‘living on the spread’ between our lending rate and our borrowing rate.
At $4 million in capital, our capital pool was ultimately too small cover the costs of administration and management. Because our work tended to be high touch, more remote, and in “one off” projects, we estimated that a fund of $15 – 30 million was necessary to support the work we were doing.
We frequently discussed establishing either a ‘product approach’ or a ‘bundling approach’ to our lending practice in order to reduce the costs of management but the field was too immature to support these approaches at the time.
The promise on the philanthropic side of program-related investments to fill early-stage-venture space is very slow to materialize. This seems to be the distance between courageous staff who are seeing the promise of this new field, and more traditional governors who are reluctant to risk core capital.
Lesson Four: Diversify your own support
For the fund’s first 5 years, a federally funded loan loss reserve covered up to 70% of our consolidated losses for our lending agreements. Our post mortem on the fund clearly showed how the loss of this guarantee in Year 5 affected both our mission-based lending and our ability to further capitalize the fund.
As a result, in Years 6-10 our portfolio became much more conservative, focusing on fewer, larger loans in safer industry sectors and larger geographic centers. In addition, we were only able to acquire $400,000 in new capital during that time.
Our experience highlighted the significant role governments have to play – in supporting intermediaries, creating investment vehicles that protect private capital as it moves into this new space, and incentivizing. Without governments’ participation moving forward, the flow of significant capital into higher risk investments will remain limited.
Excerpt from a speech given by Brenda Kuecks as part of the “Impact Investing in BC: The Way Forward,” conversation, part of the Social Enterprise Catalyst event in Victoria on April 2nd.