A new term has recently entered the Third Sector finance world. Quasi-equity is being used to describe a new type of finance package being introduced currently by Futurebuilders and the Esmeé Fairbairn Foundation. But what does it mean?
Equity simply means the value of shares issued by a company. Like on the TV programme Dragon’s Den, equity finance is usually used for new, start-ups - or for significant growth of established organisations - where the level of risk is too high for a high-street bank to provide the funding. Equity investors take considerable risk – their investment may or may not end up being worth anything. But if successful, they can get substantially higher returns than a traditional loan.
However, this type of finance is usually unsuitable for third sector organisations because their legal structures will generally prevent them from paying shareholder dividends or from paying out any profits. Traditional loans are often not suitable either. When an organisation is starting up – or undergoing significant growth - it will often experience financial deficits for a period of time. A loan increases the scale of the deficit, damaging the balance sheet and potentially making the organisation appear unviable or even insolvent.
Problems with using traditional private sector forms of finance in the third sector have led funders and lenders to come up with different models for providing investment finance to the sector. Quasi-equity is the latest of these.
Futurebuilders are experimenting with a quasi-equity product with a social enterprise working in emergency healthcare. If the enterprise grows as expected, an agreed percentage of the revenue will be paid back to Futurebuilders over a fixed period of time. If the enterprise does not grow at the expected rate however, they will not be required to make repayments.
The Esmeé Fairbairn Foundation has made a similar loan to an environmental charity to develop its consultancy work. Loan repayments are based on how much revenue the charity earns from this work. If earnings do meet the projected levels then the foundation will get a better rate of return than it would on a traditional loan. But if the charity fails to generate the extra income projected it won’t have to make loan re-payments – so the risk for the charity is removed.
If these early experiments with Quasi-equity are successful it may become a more familiar form of finance in the sector. If not, like so many buzz words, it may disappear from the vocabulary of the world of funding and finance.
