Following our recent report into mergers among charities and social enterprises with Social Investment Business, our chief executive Richard Litchfield blogs to reflect on the research and its implications for future merger support programmes.
We recently published Match Points, the findings of our research into the attitudes of charities and funders to merger, which we conducted for our partners Social Investment Business. Our aim was to understand what finance and support might help break down the barriers to more and better mergers.
The feasibility study unearthed some surprises. We interviewed 20 front-line charity leaders and the evidence showed real demand for more help from VCSEs exploring merger. However, we didn’t find a corresponding motivation from funders to meet this need at present, or at least not through a dedicated Merger Fund.
As the chief executive of the sector’s merger specialists I was left with a question – ‘would a Merger Fund not work, or has the case just not been made?’ I believe it’s the latter and, though more work is certainly needed, we’re now much clearer what issues must be tackled to build a successful fund:
- Mergers are perceived as risky to finance, because they often happen in situations of financial distress and are difficult to implement
- Loan refinancing represents an opportunity to enable exits and recycle capital for greater social use, but it also worried some funders – would they be expected to take a haircut, or was there a PR risk if this became a fund to bail out poor loans?
- Only around 70 mergers currently occur annually, raising a question about whether enough demand was there for a Fund to be viable
When I look at these concerns I think they boil down to misunderstandings of the financial dynamics of merger. This is not a criticism of funders, but does show the need to shine still-greater light on the underlying economics behind two merging charities.
The financing case for larger ‘strategic’ mergers and distress mergers could usefully be examined. For instance, we previously found that seven of the largest nine mergers in 2013/2014 had grown in excess of “the sum of their parts”, only a few years after merger. VoiceAbility chief executive Jonathan Senker described his 2010 merger as the “bedrock” for a 26% income growth in the years since, and they more than tripled the number of people they support. Large mergers can see these kinds of benefits, even if they take time to materialise.
Meanwhile in cases of financial difficulty, which account for many charity mergers, we’ve found that when a struggling organisation is taken over by a larger charity, then this restructure can help to improve the financing risk of the smaller organisation significantly. If we worked in a regulated market with credit ratings then this would be much easier to see. But even as it stands, past success stories like Blue Sky’s merger into Forward Trust, My Time’s into Recovery Focus, and Grenfell joining Evolve are solid examples.
So what about demand?
As the current pool for charity mergers starts at around 70, the critical success factor for a Fund is whether it can catalyse additional ‘latent demand’, unlocking new mergers that wouldn’t have happened otherwise. We estimate several hundred charities are at some stage of exploring merger. Given social investors have now made over 2,000 deals, it may be that the most fruitful place to look for this latent demand is with those charities who are struggling with loan repayments and may be keen to seek a merger to strengthen their financial resilience and therefore impact. As one manager we spoke to simply said,
“if [merger support] had been available to us, we’d have probably merged long before now”.
The research we’ve done has brought progress in illuminating the often-shrouded subject of charity mergers and sharpening our sense of the practical challenges facing those who provide finance. But more materially, we’re also pleased to report that this work has brought about a willingness on the part of Social Investment Business and some other funders to support mergers and restructuring for their portfolio organisations in a bespoke way.
If this support is well structured, promoted widely across their portfolio to test demand and we measure the outcomes, this should provide important evidence for the need (or otherwise) for a full Merger Fund. We wish them well with this initiative, which could set us on the road to transforming more organisations and the lives of their beneficiaries.
Please contact us on 020 7250 8334 or email firstname.lastname@example.org if you would like a conversation on how we can help your organisation make a transformational change by providing specialist advice and support.