Quasi-equity / Revenue participation
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What does it mean?
Quasi-equity fills the gap between debt and equity and aims to reflect some of the characteristics of both. Quasi-equity, also known as revenue participation investment, is usually structured as investments where the financial return is calculated as a percentage of the investee’s future revenue streams.
Who might use it?
A quasi-equity investment can be a useful source of finance when debt financing is inappropriate or too onerous for charities or social enterprises, or where share capital may not be possible due to the investee’s legal structure. Unlike a loan, this investment is dependent on the financial performance of the organisation. If future expected financial performance is not achieved, a lower or possibly zero financial return is paid to the investor. Conversely, if performance is better than expected, then a higher financial return may be payable.
A quasi-equity investment may be structured so that its return is capped (e.g. revenue participation payments cannot exceed double to the original investment size), or be limited in duration (e.g. the right to revenue participation is extinguished after a specified period of time).
Quasi-equity can be utilised by any organisation, but may be more attractive to a social enterprise that cannot offer shares or if a loan would be too risky. Quasi-equity provides a more equal sharing of risk and reward between investor and investee.
Who provides it?
- Big Issue Invest can provide loans between £50,000 and £1m and is able to partner with other organisations for investments above this limit.
- Bridges Ventures: Social Entrepreneurs Fund invests up to £1.5m per investment, in social enterprises based in England.
- Bridges Ventures: Venture Funds invest between £500,000 and £10m in ambitious growth business in four investment themes: Underserved Areas, Environment, Education & Skills and Health & Well-being.
- CAF Venturesome can offer quasi-equity loans between £25,000 and £250,000 specifically designed to meet the needs of small and medium-sized charitable organisations.
- Social Investment Business can provide quasi-equity facilities from £50,000 to the maximum of £1 million.
Case study - Charity Technology Trust
Charity Technology Trust (CTT) works with charities to help them become more efficient through the use of information technology. In 2006, the charity began developing a technology donation portal, CTX, supplying brand name software at very low cost to charities. It required up to £100,000 of investment in infrastructure and marketing to enable it to launch and market this portal. Initially, CAF Venturesome provided a bridging loan of £50,000 to provide confidence to the management team as they fundraised for development capital, and a standby facility of £50,000 to underpin cashflow as the charity’s core operations grew.
CTT had difficulties in accessing grant funding, however, as it transitioned to a more commercial model. So, in 2007, CAF Venturesome offered the charity a further £50,000 in the form of quasi-equity, with repayment to come from a 2 percent share of future gross revenues. The facility was offered over seven years, with repayment capped at double the initial investment.
This was a high risk for CAF Venturesome as there was no certainty that the new, scaled-up business model would work, although CTT’s forecasts were based on reasonable and well-researched assumptions. CTT’s revenue exceeded forecast, and the charity decided to repay the entire investment to CAF Venturesome, four years ahead of schedule – giving CAF Venturesome a handsome return on its investment.