Windmill Microlending: A Bond to Transform Lives and Livelihoods
SVX is presenting a series of impact investing case studies to share models and lessons learned from our work to develop strategies and raise capital through our advisory services and investment platform. This learning series is focused on organizations, enterprises, and funds seeking debt and/or equity financing to start or scale their impact. This series is supported by the Government of Canada through our work as a designated national service provider for the Investment Readiness Program (IRP).
From 2017 to 2019, Windmill Microlending raised $4.5M from a group of institutional and individual impact investors.
SVX structured the offering and made the investment opportunity available to impact investors across Canada on its breakthrough investment platform. Investor engagement activities were done in collaboration with the Windmill development team.
An OCE grant program was critical at the early stages in providing design funding by SVX.
Windmill has since been named by The Logic as one of ten most innovative non-profits/charities in Canada in 2019.
About Windmill Microlending
Funded by the public and private sector, Windmill Microlending is Canada’s largest and most successful microlending program for immigrants and refugees. Windmill (previously known as Immigrant Access Fund), a registered charity founded in 2005, supports immigrants and refugees who come to Canada with education, skills, and experience but are unable to continue work in their respected professions here. Their loan clients are commonly under-employed in “survival jobs” because they cannot afford the cost of Canadian credentials or accreditation. Think of the case where a healthcare professional is employed as a janitor in our hospitals, rather than as a doctor or nurse. Windmill was founded in response to this, starting as a determined and innovative group in Calgary led by Dr. Maria Erikson, organizing to support the accreditation of six underemployed individuals at Erikson’s hospital.
Windmill provides microloans of up to $15,000 to internationally trained immigrants so they can obtain the Canadian licensing or training required to work in their field. The loan can pay for professional exams, training, assessments, professional association fees, books and materials, living allowance and other expenses related to obtaining the required credentials or training. Interest on loans are set at RBC prime + 1.5%, and Windmill also has a zero-interest Refugee Loan Program.
On average, Windmill’s clients experience an average income increase of over three times their income by the time their loan is repaid (2–4 years later). Throughout the life of the loan, individuals are matched to a coach and develop and follow a learning plan — this design element is then able to accommodate and consider individual challenges of immigration and settlement on a case by case basis. This method has been evidently successful: the repayment rate for Windmill loans is over 97% .
Capital Need: Scaling Up Loan Capital
Windmill hired its first CEO in early 2017, Claudia Hepburn, who was previously the Executive Director and Co-Founder of The Next 36. She was tasked with a moonshot vision of growing Windmill’s impact and activities by tenfold. However, in order to have a shot at accomplishing this, Windmill needed to rethink its capital stack strategy and how it could grow its loan fund in a scalable way.
The charity’s operational and loan pool funding structure provided the innovation and relief required for the organization to reach its steady state. Operations were predominantly funded by the federal and provincial governments, namely IRCC (Immigration, Refugees and Citizenship Canada), Alberta (where Windmill was founded) and Ontario (where a majority of new clients are settling). The loan fund was comprised of approximately three-quarters Windmill equity and one-quarter from a line of credit at RBC, which was backed by guarantors. The amount backed by guarantors each year dictated the capital available.
However, this structure was challenging in the pursuit of an inflection point in growth. Windmill could either find more guarantors for its bank loan or seek vastly more philanthropic capital. Both strategies presented risks and challenges in terms of adequate foresight and planning.
There was a clear need for an innovative capital strategy.
Tool: A community bond offering
At SVX, we seek to help organizations start or scale their impact and to bring novel impact investment products to market. When the SVX was initially approached by Windmill, it was clear that they had an innovative capital and business model, strong impact management and metrics, and the potential for an impact investment offering. This potential needed to be harnessed into a thoughtful development process, leveraging the insights and experiences of the SVX team and existing models already deployed by other social purpose organizations to access capital. And so, the Windmill bond was born.
Windmill’s Community Bond:
The bond has a number of novel characteristics:
- An impact-first, community-based bond comprised of three series
- Interest ranging from 0.75% — 2% per annum and maturity terms from 1 year — 5 years
- Principal is repaid at maturity
- Available to accredited investors only ($50K minimum investment)
- Community Bond investments pooled directly into Windmill’s Loan Fund for disbursements to clients
Windmill’s Community Bond offering was launched to the market concurrent to the launch of SVX 2.0 and 11 other impact investments on our new platform in November 2017 (you can read about that here).
The Community Bond offering enabled Windmill to reach out to impact investors across Canada (and potentially investors in the US at a particularly polarizing time in its newcomer and refugee policy), identify those who were aligned to its vision and mission, and present them with a novel investment opportunity.
For Windmill, the Community Bond also provided a higher margin than loans made from borrowing off its line of credit (given Windmill borrows from RBC at prime and distributes out loans at prime plus 1.5%). The additional margin provided a buffer for Windmill to cover the costs of loan delivery and supporting client success.
Development & Design
SVX and Windmill engaged in a development process that included a number of stages:
- Discovery: Following an initial scoping conversation, SVX team members worked with the Windmill team over a number of months to gain a better understanding of the organization including finances (operating and capital, management team, and impact, and the potential for impact investing, including early models that could be applied to the Windmill case (eg. YWCA Elm Centre bond model).
- Design: SVX provided support on the financial model, term sheet, and structure of the offering to help navigate the financial viability of the bond as well as compliance with relevant securities regulations. Windmill Microlending leveraged its own legal counsel to navigate its legal responsibilities.
- Deployment: The offering and associated materials was ultimately reviewed by the SVX Issuer Review Committee and recommended for onboarding to the platform. The campaign was officially launched in late 2017.
The following is a chart outlining the rationale behind the various design choices which ultimately reflected in the characteristics of the resulting bond offering.
Windmill’s Community Bond was one of the early examples for the capital advisory practice at SVX. We rolled up our sleeves, got a bit messy, and did a few things for the first time. We have taken this experience as foundational to how we approach design and structure engagements with social purpose organizations, and we continue to innovate alongside our clients and colleagues in the space. We have also considered a few lessons to keep in mind for interested charities and non-profits as they embark on their impact investing journey. Those key lessons are:
1.Evaluate whether a bond is the right fit or not for the organization. Ask a few key questions:
- Buy-in: Is there buy-in and engagement from the Board of Directors and senior management, including a long-term commitment to the capital raise process? Is there buy-in from the community?
- Financial fitness: Is the organization able to take on debt on their balance sheet? Does the organization have revenue streams or cash flow to pay investors during the investment term, and to pay them back at the end of the proposed investment period?
- Investor audience: Is there an investor that will be able to garner support from the community? What types of investors will be eligible to invest in the bond?
- Expertise: Do you have access to the necessary external impact investment and legal counsel? Do you have the necessary internal and financial resources to manage the capital raise process, including ongoing administration for investors (e.g. interest payments and reporting)?
2. Tailor the financing structure and terms to the organization’s needs, then match it to the interests of investors.
The impact investment model that an organization selects should be tailored to their specific needs and circumstances that has been tested with potential supporters. While Windmill’s pilot demonstrates a successful implementation of a bond offering for an unsecured loan funded by aligned and mission-driven accredited investors, a different organization with a different set of prospective investors may require different terms, rates, investment sizes, or even an entirely different financing tool altogether.
3. Consider blended financing strategies as well as unintended effects. Investment capital alone did not establish, operate, or grow the Windmill Microlending organization. Its work and impact are made possible by a thoughtful blended financing strategy including philanthropy, government support, and lending capital from a variety of sources. It was the addition of lending capital that helped provide another tool in its blended financing kit, as it builds for the long term, but would not have been transformative without the foundation provided by all the mechanisms that were already in place.
For impact-first charities and non-profits such as Windmill, the creation of an investment vehicle, alongside a philanthropic strategy, could see some cases of anticipated donor capital transferring to investor capital (which naturally increases the cost of that capital). However, while this occurred in a few discrete cases, Windmill was able to vastly expand its champion network, convert guarantors to investors, and use the community bond angle to tell their story more broadly to impact-driven funders overall. We see this as a win.
Over the course of two years, the SVX and Windmill teams structured and launched the inaugural community bond investment offering on the SVX platform, and successfully raised $4.5M from 32 Canadian impact investors. The product was conceived and launched in less than six months, and SVX and Windmill worked together successfully for 18 months in raising the $4.5M.
Since offboarding from the SVX platform, Windmill has continued using the tool designed by the team to raise an additional $3.5M. The product has been attractive to community foundations, individual investors, corporations, and private family foundations across Canada, and Windmill continues to scale their operations and support for immigrants and refugees.