Improved financial resilience represents one of the Arts & Culture Finance team’s key outcomes for its investees. Financially resilient organisations are better placed to withstand exogenous shocks such as unexpected funding cuts, cost increases or unforeseen events which call upon profit reserves. For our portfolio of impact-driven arts & culture organisations, being financially resilient means being able to focus on staying true to purpose rather than simply survival. The covid-19 pandemic could be seen as one of the greatest tests of the sector’s financial resilience and it is against this backdrop that our Investment Manager, Rachel Green, took the opportunity presented by her Masters’ thesis to take a deep dive into financial resilience and the experience of the Arts Impact Fund, our first fund which provided loans to 25 arts & culture organisations across England.
The Arts Impact Fund was created with the ambition of empowering the sector to achieve its social and artistic aspirations through building financial resilience via access to dedicated, flexible and affordable repayable finance. Our colleague’s Masters thesis undertook an interim evaluation of this objective, testing the hypothesis that a loan from the Arts Impact Fund contributed to the improved financial resilience of its investees, using rigorous quantitative and qualitative analysis. The results, comparing the pre and post loan periods for each organisation, support the hypothesis and therefore help to endorse the Arts Impact Fund’s mandate.
Financial resilience is very much context dependent rather than an absolute, objective and comparable state of being. A broad range of qualitative and quantitative indicators was therefore selected for the research, reflecting the lack of a silver bullet definition as well as the varying quality of available information.
The quantitative study looked at nine metrics from organisations’ income & expenditure statements and balance sheets and found that the relationship between organisations’ gross income, fixed assets and net assets before and after the loan supported the hypothesis. Taking out a loan to acquire a new building (increasing fixed assets) can generate additional sales (increasing gross income) and is one of the most popular use cases for our finance.
The qualitative study collected our investees’ own perceptions of their financial resilience, providing a valuable additional perspective. Definitions included having sufficient cash reserves to weather unforeseen challenges and well diversified income streams including earned income to minimise specific risk. The importance of not only resources but management of those resources, namely having good quality financial information to enable effective risk management, was also recognised. Although financial resilience itself doesn’t guarantee mission delivery or indeed artistic excellence, it is necessary to deliver these ambitions in a sustainable way.
Of interest is the significance of not just the loan itself but the investment process, ongoing support provided by the team and the ability to attract additional finance which were all rated as contributing to improved financial resilience by investees. Working with the Arts & Culture Finance team to review financial models and business plans helped many organisations to really test their assumptions and improve the quality of their forecasts, leading to more robust planning and strengthened risk management.
These findings resonate with the perspective of investees captured in the Arts & Culture Finance annual portfolio survey. In the same period covered by the research, the survey found that 78% of respondents with investment through the Arts Impact Fund considered it to have helped their organisation achieve their business objectives a moderate, considerable or great deal. Beyond this, 44% of respondents felt that the investment had been instrumental in helping them attract additional investment or funding.
The research’s limitations mean that caution should be taken when interpreting the results and these limitations include the relatively small sample size and the post loan period generally being shorter than the pre loan period (given the lifecycle of the fund as the fund made its investments between 2015-2019, with the last loans being repayable by 2025).
There are clearly many factors influencing an organisation’s financial resilience other than the Arts Impact Fund loan and these were not analysed in any meaningful sense. Nevertheless, the results are both encouraging and illuminating and we hope that they will not only influence how we best support arts & culture organisations but also prove useful to organisations considering whether repayable finance represents an appropriate option.
The results are particularly interesting in light of the pandemic, a major test of financial resilience for the sector, requiring management teams to make rapid decisions and organisations to dig into their reserves, innovate and potentially pivot their operating models. Having taken on a loan to develop new earned income streams to shift away from reliance on grant funding only to be hit by a seismic shock which obliterated earned income overnight, the wisdom of taking on repayable finance was challenged. The fund’s investment period means that the pandemic dominates the post loan period for many investees. Our research, however, shows that even those organisations most exposed to the pandemic (using receipt of Culture Recovery Funds as a flawed but reasonable proxy) still demonstrated an improvement in financial resilience in the post loan period. This of course reflects the significance of the emergency government funding, but also the flexible approach taken by the fund to supporting its investees. The performance of the portfolio during the pandemic could be said to endorse rather than question social investment as a viable financing option, with investees offered support by the fund and therefore able to withstand even a seismic external shock.
As the impact of the pandemic recedes, we will continue to build an increasingly robust evidence base which will also include investees from our most recent fund, the Arts & Culture Impact Fund. We are encouraged that our research helps to support our belief that funding which aligns with an organisation’s mission and organisational capacity should be able to support its financial resilience. Having sufficient appropriate funding available to support arts & culture organisations across the UK, but also internationally, is vital to the development of a thriving sector which can take creative risks and deliver excellence across financial, impact and artistic objectives.
For further information about the research please contact [email protected].
For further information about our open funds, please visit the Arts & Culture Impact Fund page or submit an enquiry.