EP04 - The New Wave of Investment: A Conversation with Ollie from Resonance

EP04 - The New Wave of Investment: A Conversation with Ollie from Resonance

Are you ready to challenge traditional investment models and make a genuine difference? This episode is a must-listen, as we welcome Ollie from Resonance, a trailblazing Community Development Finance Institution based in the UK. We explore their unique approach to impact investing, providing growth-stage capital to social enterprises in the Southwest, West Midlands, and Northwest of England. Their portfolio ranges from ventures addressing economic inequality to enterprises focused on health, well-being, and the transition to net zero. Their investment model is unique, including unsecured loans, revenue shares, and a hint of natural equity.

We take you beneath the surface of social impact investing, dissecting the financial considerations and potential returns. Traditional methods of capturing value may not be the norm in this sphere, but it doesn't mean returns are unattainable. We discuss the intriguing concept of earning impact returns and explore tax relief schemes like the Social Investment Tax Relief and Community Investment Tax Relief. Ollie shares invaluable insights from his journey, revealing how it's shaped his perspective on the potential and power of aligning capital with our deepest social and environmental values.

Finally, we delve into the evolution of social and impact investing, spotlighting the significant strides made in the UK. The environment serves as a catalyst, and pension funds are stepping up, recognizing their responsibility extends beyond financial accumulation. Ollie imparts valuable advice for budding founders, underlining the impact of passion on social and environmental entrepreneurship. Tune in to learn how you can align your investments with your values and make a tangible difference in your community and beyond.

Transcript

Stewart Noakes: 0:46

All right, fantastic Episode four of the new investor circle series season with Olly from Resonance. Thank you so much for being here, my friend Lovely to have you here. Pleasure, and all the way from sunny Bristol today. Right, it's sunny Bristol, exactly Wonderful.

Ollie Pollard: 1:01

The sun never stops shining.

Stewart Noakes: 1:03

Now we know each other through a couple of different raises and a couple of different formats. It's wonderful to have you here, and I know everything's changing for you guys at Resonance for the moment. So when I ask you this question what's the thesis of the fund? I guess you're going to have to tell the full story, right? So what's it all about?

Ollie Pollard: 1:17

Yeah, great, thank you. Well, look, resonance has been a social impact investor in the UK for a long time. We've been eight years of running funds investing into growth stage social enterprises. We are just a really interesting point in time where we've finished deploying and gone into the sort of fully deployed phase of three funds and we are starting a new mandate, launching a new mandate from September, which encapsulates kind of all of the we think, hopefully the best bits of those experiences we've brought and some new ones. So, in headline terms, we are beginning our journey as a what's called a CDFI, a Community Development Finance Institution. This is a accreditation from BASE, in fact, which allows us to amongst other things, it allows us to give investors access to the Community Investment Tax Relief, a little bit like an EIS tax relief or an SITR, as it was Social Investment Tax Relief, but slightly different. So, firstly, the structure is a CDFI. Cdfis are well known in the US, less so and less operate, a lesser scale in the UK, but heading in the right direction.

Ollie Pollard: 2:31

The mandate still is to provide growth stage capital to social enterprises in regions where we're specialists. So at the moment we're focused on the southwest of England, the West Midlands and the Northwest of England. Those are regions where we're based geographically. We have teams, we are on the ground. We will be there alongside our entrepreneurs having coffees, not phoning or traveling from London or further. We continue to focus on social impact first, financial sustainability and profitability. Alongside that, we have historically had a fairly strong vision that a social enterprise has a certain set of sort of statutory features. So we do believe in community interest companies as a legal structure. It's a UK based sort of legal structure for social enterprises. We still want to invest predominantly in kicks CICs. We also invest in charities with trading operations and we are now for the first time, also investing into companies limited by shares with mission.

Stewart Noakes: 3:42

Ollie, you've just gone on mute mate. It's really weird. All the sounds just cut out. I don't know if the cables come out. I find it so bad? Yes, I don't know what that was. Don't worry, I did that one out. We'll just leave it in for fun. If you're watching this and just seeing that, let's talk to you.

Ollie Pollard: 4:16

Yeah, what we don't do is tech investing, as you can tell. Where was I in that? So, yeah, we did invest in social enterprises. We continue to invest into kicks, predominantly in charities, but we are also investing into companies limited by shares, where they have what we consider to be structural features of social enterprises. Those are quite. We find a lot of entrepreneurs who are not used to social enterprises as a structure. We'd say they're quite limiting. A dividend cap, for example. Who's that serving? They're all fundamentally about long-term commitment to mission and recycling capital and not allowing the hunt for profit to outweigh the hunt for impact. Okay, it's an argument whether they're successful, whether they could be the whole story or not.

Ollie Pollard: 5:04

Just one last quick thing. We are focused on three areas of what we call impact. So it's socially economic inequality, health and wellbeing outcomes and, for the first time, a just transition to net zero. So they're all kind of social in a sense. None of them are explicitly environmental health. They're all linked in, but they are as wide a spectrum as you can get really of what we consider social and environmental impacts. That said, that means very clearly we're not like a green tech investor. We need to know that. The reason you're involved in, let's say, green tech is because you're wanting to look at that from a inequality and social justice kind of perspective. So access to green jobs definitely would be a part of the just transition. Green jobs per se perhaps not.

Stewart Noakes: 5:49

Okay, so first question Equity debt. How does this model work?

Ollie Pollard: 5:53

Great, yeah, good question. So historically we've been, as has been the case for most UK social impact investors, using unsecured loans to provide growth capital to social enterprises, the reasons for that being that largely that's all that they could take. Charities can't issue debt. That's very kind of your equity, cics if they're companies into a guarantee also kind of your equity. But some CICs that there are companies into our shares and obviously companies that shares can do equity. So the movement over time has been towards wanting to do more like equity.

Ollie Pollard: 6:24

So we actually do three different products. We do unsecured loans within this fund. We do revenue share, which is essentially a debt structure but the returns and our interest coupons they are revenue shares beyond a certain point of revenue growth. And we do some pure equity for a very small amount. Now that pure equity obviously is in the case, it is still two enterprises that are asset locked, for example. So a CIC with a company into our shares, the reasons you'd invest in equity in that company are quite different, I guess to sort of a seri-tay looking to exit. So it's all three things it's unscured loans, it's revenue share as a quasi-equity product and a small amount we're thinking 5% of the fund is in natural equity.

Stewart Noakes: 7:06

OK, so I've got two threads from this, one which I think is incredibly interesting for people because it's so different to the sort of VC and other routes that we normally look at. So first thing, whenever I'm talking about residents with people, the first thing people say to me is this social enterprise doesn't make any money, so why would I invest into that kind of thing when I can't possibly expect anything really more than my money back right, what sort of return am I going to get? So how does that work? Does social enterprise make money? Is it worth doing this?

Ollie Pollard: 7:33

Yeah, yeah. Well, look, it's an important and interesting question because, it's fair to say, I think, if you were to be able to look at all of the data, social enterprises do distribute less profits and perhaps make slightly lower profits potentially, but actually I think what you see is that they are sustainable in a different kind of way. So they are potentially some ways counter cyclical If you think about the demand for their services and their products. Often it goes up when the economy goes down, right, yeah, so there's that element to it. I think.

Ollie Pollard: 8:09

If you think in traditional terms of exits, it is difficult to picture that you can make money out of these, because what is an asset lock?

Ollie Pollard: 8:17

For both very nature, it's something trying to stop you being able to sell this for its constituent parts or to sell it full stop.

Ollie Pollard: 8:23

So there's a lot of protections that make a lot of the traditional ways of capturing value for investors that they're not present, and I think what we look at is the time scale over which you're willing to invest and the amount of impact you get delivered as well. So I think my simple answer is yes, it's clearly less obvious that you're going to make a lot of money out of investing into social enterprises. I think there are some structural reasons for that, but there are also some reasons of time horizons that we might look at the business models of social enterprises, if we're being honest about what matters. And then there's the idea that you get impact returns. When we say we're an impact investor, we are talking about tangible, measurable, monitored impact delivered through these business models. So we like to think that, whilst you may expect, as an investor in these, a lower return or, let's say, a steadier return for a different time period, you're also going to receive real impact metrics around what's being achieved for that investment.

Stewart Noakes: 9:24

Okay, so it should be something you care about, basically something that you want to see different in the world.

Ollie Pollard: 9:29

Yes, and also I think it's about accepting that the time scales over which an IRR makes sense are going to be slightly different to the time scales over which an impact and a sort of slower rate of sustainable profit might make sense. It's certainly difficult to fit it into a typical limited partner's thinking that the returns might come after 10 years, even financial, when we will know the IRRs heavily influenced by the cash flow is up front. So it's trying to let the weight of impact and the importance of impact within the model kind of rebalance some of the financial preferences, not necessarily to make money but to when to make the money and how much is sort of necessary.

Stewart Noakes: 10:15

Okay. Now the other question is usually everybody really that I deal with knows what SCIS and EIS is when we're talking about investment, but the kind of what was the social impact, tax relief or what it is now the community stuff how does that work? Is it very similar to SCIS?

Ollie Pollard: 10:32

Yes, well, so social investment tax relief, as of April this year, is no more. It was very similar to EIS and was designed to be so, which was in some ways its strength but in other ways its weakness. Social investment tax relief has gone, so in some sense, that's not dwell on it it it looked a lot like EIS, but it was available to use for social enterprises and on debt, where EIS was largely equity.

Ollie Pollard: 10:55

Community investment tax relief is a bit different in that it's a tax relief available to investors for investing into a CDFI and accredited CDFI. Sitr, like EIS, was for the investment into the underlying investee, the organization. You might have a manager as an advisor to the fund, but ultimately you're directly investing into the organization. Citr community investments actually is you're entitled to that at the point you invest into the CDFI. So the CDFI then goes out and does the investing, creates a portfolio, creates the returns, pays them back to you, but the relief is for being an investor in the structure that is the fund. The relief is 25%. The relief is paid out 5% per year for five years off of either income tax or corporate tax. So, interestingly, it has the ability to be a tax relief used by companies with an income tax bill.

Stewart Noakes: 11:51

Interesting About 5% every year for five years, rather than getting that relief in the first year that you do the investment, basically, which is how the ASA works. Okay, interesting. So I mean, ollie, you're obviously very good at this stuff, you've been doing this for a few years, but what's the background that you have that makes you awesome at this? Did you read classics at university, or what is it that you're doing?

Ollie Pollard: 12:12

Yeah, I'd love to feel like I'm awesome at this every day. Look, I studied economics and international development at university and I was very much interested in the world of development and I'd lived most of my life in developing countries, as we termed it then. I then went and worked for an investment bank because I had some student loans and I thought this sounds exciting and capital markets are fantastic. The interesting and I spent 10 years working for the investment bank through the financial crisis and was fascinated and horrified by how the financial markets responded and coped and what was thrown at them afterwards to try and keep them going and just have this kind of underlying feeling of there's a financial economy and then there's a real economy and I can see one of them is really suffering, but the financial economy seems to have been continued in some ways not unaffected. But that was quite an interesting experience. So that began a journey of getting to know a bit about the fact that social investment and impact investment existed back in 2015.

Ollie Pollard: 13:15

I went and lived. I finished working in banking, I quit and worked in Sri Lanka for a year and a half on a tea plantation, on a project to bring a sort of an impact tourism project to life, which was fascinating and gave me huge perspective. And then I came back and did an MBA. I got to know residents.

Ollie Pollard: 13:33

Actually already I did a small project for them and then I went and did my MBA at Oxford Business School Again, great privilege, really interesting. Mostly interesting in terms of how much focus there was on the changing reality of what business needs to contribute and what investment needs to contribute to the world and its problems. And that is kind of how the school set themselves up as a business school to kind of solve for those problems rather than making great business people or consultants, bankers etc. And then I've returned to residence and I spent the last four years at residence working on our great enterprise funds and our overall kind of strategic vision of how we make finance a force for good and bridge between investors and social enterprise and charities, which you know the UK is a fascinating place to do.

Ollie Pollard: 14:19

It typically is held out to be was talked about often as being sort of quite ahead of the game on social investment. I think what's the truth is that there's a lot of central efforts have gone in policy work, big society, capital's existence, the Access Foundation. There's a lot of work's gone on around government putting the frameworks in place to make social investment a thing from the social investment task force, from Sir Ronald Cohen. There's a big movement here. I think that there are other parts of the world, regions of the world now that have really caught up, using perhaps more market mechanisms, more investor initiated impact drive. So you know, I still think it's an almost impossible task to make money, inherently do things for moral reasons.

Stewart Noakes: 15:09

But I think that's not necessarily what you're trying to do.

Ollie Pollard: 15:13

You're trying to align all of the outcomes with a financial.

Ollie Pollard: 15:17

If you need to know. The environment has been the great catalyst of this, because I think it's been much easier for people to picture the idea that climate change and environmental degradation is an externality that we have needed to bring in to the picture and that matters on companies' balance sheets. It matters on investors' balance sheets, so that journey has helped catalyze a lot more work around what all impacts negative as well as positive should be recorded and part of business's modes of operating and for investors as well, the logic behind how can pension funds exist with only a fiduciary responsibility when the times after which they're going to expect their returns for most pension holders we could have already had catastrophic climate change. And you sort of think when you look in those terms, it's obvious that, as the stewards of people's pensions, there's a lot more at stake than purely the amount of money they have in that pot at retirement. But yeah, it's been a fascinating time to be on this journey, but it does constantly feel like there's a lot more to do and the problems get bigger, not smaller.

Stewart Noakes: 16:25

Yeah, absolutely no. For anybody who doesn't know residence, are there any stats that you can throw out there, just so they can understand the size of what's been going on and what you've been involved with?

Ollie Pollard: 16:34

Yeah, so I mean residence is we feel big and as big as we've been, and we currently manage about 350 million of other people's money in the UK as a UK based social enterprise. So we feel as big as we've been. This is the biggest asset and arrangement we've ever had. That is obviously pretty small in the big world of capital markets. It's important to think. 330 million of that is made up of property funds. So we have for a long time been invested in property. We buy properties and we manage those properties for charity and housing partners to put vulnerable people into those houses.

Ollie Pollard: 17:13

These are not levered funds. These are not particularly. In some ways I'd say they're not very sexy funds. In a sense, they're just very simple. It all began with some mongos the homeless charity saying to our now CIO we just don't have landlords that are ethical enough to keep the people we need, that are vulnerable, in homes for long enough. So the logic was well, could we find a way that we buy them and we lease them to you? You find and know the people, the vulnerabilities and the beneficiaries. We do the simple bit of owning, renovating and handing over on sensible leases, with an ethical land or behind it, to you and that is how it began, and so the vast majority of residences funds in the management are property funds.

Ollie Pollard: 17:50

We have now got a number of different areas of focus from homelessness, women in supported homes, vulnerable women, people who have suffered domestic violence, and we have disability funds as well. So that will continue. We'll continue to scale the different specialisms in providing homes. But the key thing that we have always said is that it takes more than just a roof over some's head to solve all of these problems and to create pathways out of being in vulnerable situations. So that's where the other work we do around investing in social enterprises.

Ollie Pollard: 18:21

We also invest into community assets. That's housing, leisure, sports and energy those two areas. So just bouncing around a bit here. But growing enterprises funds community asset funds makes up another 25 million of the funds under management that residents have. We are small and we will our growing enterprise over the next five years. We'll have another, a fresh set of 10 million pounds to invest over the next five years. It's we feel we can do a lot with relatively small amounts of money and we continue to focus on regions rather than just the whole UK. So residents can invest into property through property funds at scale, social enterprises at sort of community, local, regional scale, and community assets, again nationally. But again the community assets piece is a whole other story, but it's really fascinating. It's really about letting the wealth generation be owned by the communities, rather than this kind of investor comes in and provides the capital of things achieved and then the money comes out again.

Stewart Noakes: 19:23

I guess the phrase democratization might be used a little bit there, right.

Ollie Pollard: 19:26

Yeah, definitely, and that's a really key part of that particular part of the business, and I think that's in some senses thinking about that bigger picture of what are we trying to solve. For it's actually really fascinating and really important the idea that actually this isn't all about an investor return. It's actually about a wealth creation within a community and an ownership of the outcomes and an ownership of the of the impacts that change.

Stewart Noakes: 19:52

No, I first came across you guys through the academic health science network and it was all about the health and well-being fund and I'm trying to remember the exact number, but I think one will introduce the topic. He said it's something like 25 or 30 companies that you guys have invested in through that health and well-being fund. And I looked in with this quizzical face. I just couldn't compute because it was probably at that time the highest deployment of capital in the Southwest. But even the Cornwall-Island City fund hadn't done like 25, 30 investments at that point. So you say it's a small amount of money but it's doing a lot of good.

Ollie Pollard: 20:24

Right, it's getting in a lot of places, yeah, and the health and well-being fund, I'm proud to say, is more like 50 deployments now as of finishing just before Christmas, and that's with a health and well-being focus and only in the Southwest. So I think, and that's 5 million in total, has gone into just over 50 enterprises, which is fantastic. And, as you say, when you think about how staffed of capital certainly Cornwall and Devon would be in the Southwest, probably to some extent, that's a huge amount and the pathway of those enterprises as well is fascinating. Because we're also, I guess it's fair to say, as an investor, we're not particularly interested in picking winners over losers and having a 10x return in one place and accepting 40% to 60% go elsewhere. We are actually trying to sustain those companies, often through a journey towards commerciality, let alone picking the best.

Ollie Pollard: 21:18

So the vision is that actually as many as we can possibly muster of our portfolio it's not about considering great investments, great returns, but they will go on to have commercially viable, sustainable futures, better governance, better financial functions, the ability to borrow and take investment in the next phases of their business, marketing, but a lot of things that you would take and you would sort of say show me that you've done that before I can invest. We kind of say we'll invest and go with you to get to that point. And that's partly because, to some extent, the level of maturity of the social enterprise sector in the UK and until the growth fund came around which is where we got some of the money for the Health and Wellbeing Challenge fund 2015, the market in a sense didn't exist. So we've been building the social investment into social enterprise market for nearly a decade and there's work to do. But it's a journey of kind of making the market as well as kind of finding the right bits of the market to invest in.

Stewart Noakes: 22:17

Fantastic. Well, thank you so much for your time today. I want to just close out today with just one question for you, which is, for the first time, founders watching this today thinking about coming with me. What's your one piece of advice for them?

Ollie Pollard: 22:34

Show us the passion that sits behind the impact that your business drives and the authentic connection to it, and I think I would even. Obviously we talk to social enterprises and there's certain gateways to become to think of yourself as so centralized, but I actually think for all founders, my understanding is that largely it's about solving a problem and those problems are often problems experienced by people buyers. So I think it's just show the passion for the connection to the impact of the business and in that context, everybody is either a social or an environmental entrepreneur.

Stewart Noakes: 23:09

Fantastic. Thank you very much for being part of this series. It's wonderful to have this resonance lens next to VC lenses, next to angel investors and stuff, and I think it's incredibly powerful and more power to everything you guys are doing, particularly in the Southwest, which is where I tend to see what you're involved with. Thanks for being here today, ollie.

Ollie Pollard: 23:27

Well, thank you for having me. It's a pleasure, great to see you.