Structuring a really good deal

A hallmark of Big Issue Invest's risk capital fund for social enterprises is how we integrate social return targets into the investment process in a similar way to how financial targets are used in the commercial sector. In this way, achieving social impact becomes "hard-wired" into the way we operate and how we measure our own performance.

All investees are required to set quantifiable 'social return' targets, as well as financial return targets. In the case of the Call Britannia deal that we have just announced we agreed social return targets related to the numbers of unemployed people Call Britannia hires; the proportion which are most disadvantaged such as long-term unemployed, single mothers and the disabled - these categories were carefully defined together with our lawyers; and the proportion which go on to secure long-term employment and see positive changes in their lives.

We have also added an incentive for management to focus on social performance. We have done this because Call Britannia is a privately-owned enterprise into which Big Issue Invest (BII) has invested equity as well as a loan. We have agreed with CEO Karen Darby and her management team that they will receive extra equity should they sell the business and achieve both a specified high financial return and a high social return. This resembles common arrangements in the private sector where managers get a higher pay-out if agreed profit thresholds are exceeded.

For the loan finance we have structured the deal such that we will be able to withdraw our financing if the business displays 'social mission drift', specifically defined as failing to meet a minimum percentage (75 per cent) of its social targets. The mechanism is similar to the covenants that banks use to allow the recall of a loan if a company misses its profitability targets.

In addition, we have agreed that Call Britannia will fund a special purpose charitable foundation through a committed portion of its sales revenues, and will write this commitment into all of its customer contracts.  This foundation will provide support to employees with things that can create barriers to long-term employment, such as childcare costs and further education. Through its foundation, Call Britannia is helping to ensure the perpetuation of the company's social mission well beyond any eventual sale of the company to new owners. These terms are written into the company's articles and investment agreements.

Essentially, Call Britannia is creating a brand name where social value is at the centre of its financial value. Any buyer of the company would be buying into the social ethos which is, in fact, the businesses' unique selling point (USP).

BII is making this sort of financial structuring a key feature of its new fund to ensure we deliver both financial and social returns to our investors. Such incentive systems ensure management's focus on social performance and also gives us recourse to withdraw our funds if an enterprise does suffer from 'mission drift' such that we can reinvest the funds in social enterprises with the best social performance.