Erste Group’s new social finance instrument boosts growth of the social sector

 

Erste Social Finance Holding, a joint venture of Erste Group and ERSTE Foundation, has recently launched a new social finance instrument “Quasi-equity”. This new funding opportunity supports social organizations to grow and thus boost their impact by strengthening their equity. 

In an interview, Peter Surek, CEO of Erste Social Finance Holding, and Florian Ott, Quasi-equity project leader, give an overview on the new product, explain how Quasi-equity can support social organizations and outline why it’s needed especially now.

What is Quasi-equity and how does it work?

Peter: Quasi-equity is a mix of debt and equity financing, and we provide it in the form of a so-called “qualified subordinated loan”. It’s quite similar to a traditional bank loan, as it comes with an agreed repayment schedule and fixed interest rate. The main difference is that it strengthens the equity of social organizations and by that we are also able to finance projects that otherwise, due to low equity, wouldn’t be able to get any funding. Moreover, it functions like a catalyzer for funding as the increased equity allows clients to attract additional financing. 

What are the benefits of Quasi-Equity?

Peter: Clients not only benefit from a stronger equity, but also the improved risk profile opens up more funding options from private and public sources. With our innovative social finance opportunity, we can finance up to 30% of project costs, enabling clients to take additional loans from our local Erste banks to finance larger shares of their investment need too. The flexible set-up gives client enough time to develop their social projects and generate the needed revenues.  

How does it differ from loans and equity investments?

Florian: Compared to a regular loan, Quasi-equity’s flexible repayment schedule allows clients to start the principal repayments after some years The maximum Quasi-equity investment per project is limited to 300.000 Euro in general and 1 million Euro for real estate projects. The higher risk is reflected in slightly higher pricing compared to regular loans (interest rates per year in upper single digit range, depending on the individual risk and social impact), but much lower compared to return expectations by equity investors. The other difference to “core” equity is that Quasi-equity investments neither change the ownership structure nor dilute current owners. That means the organization remains independent, without our interference in their operational management.

Who can apply for Quasi-Equity?

Florian: Our product is available for social enterprises, non-profit and non-governmental organizations in Austria, the Czech Republic, Slovakia, Serbia, and Croatia, regardless of their specific legal form. The purpose of finance can be different: from opening new branches, launching new products or services and digitalizing operations, to recovering from the impacts of the Covid-19 crisis. We finance established impact-focused organizations with proven business models, who are operating at a break-even level and have a track record of at least 3 years.

Peter: We can also co-finance smaller social real estate projects with a total investment below 5 million Euros like social housing, elderly housing, kindergartens, or care facilities. Here the precondition is to have an identified plot, construction cost-assessment and a business plan that proves the repayment potential.

The product “Quasi-equity” is a joint project with Impact Hub and co-financed by the European Commission. What is the added value of this cooperation for clients? 

Florian: We’ve been awarded with a European Commission grant as one of only 14 projects in the EU to support the development of this new social finance instrument. These funds will allow us to provide social organizations also with free non-financial support, such as individual consulting, mentoring, capacity building or technical assistance. These services will be provided by the social innovation incubator Impact Hub Vienna and its partner organizations. We believe that this is essential to foster the development of our client, to scale their impact and make them more resilient in the current challenging environment. 

About Erste Social Finance Holding 

Erste Social Finance Holding (ESFH) was established in 2008 and aims for positive social impact and sustainable financial results. As stipulated in its Articles of Association, the social enterprise does not distribute dividends but reinvests all generated profits into new social projects. ESFH acts as a social finance investor and intermediary in the CEE region, investing into social business models, which are financially sustainable and launching innovative social finance instruments. For more information, please click here.

Alina Moldovan