Posted on:Friday 11th March, 2022
Scale Model of No 8 Royal College Street
The fourth in a series of essays reflecting on the Rimbaud and Verlaine Foundation’s experiences in the arts
Since at least 2010 it has been clear that the arts are facing a severe funding challenge. When the Rimbaud and Verlaine Foundation (‘R&V’) was established in 2014 one of its ambitions was to explore and develop new business models for the arts. In doing so it was also building on the experience of its sister organisation (Poet in the City) which had been developed between 2006 and 2014 as a successful example of what is usually called a ‘mixed funding model’. This essay will look beyond that model and will explore some new ideas for how the arts might be funded and what a more dynamic approach to arts investment might look like.
The mixed funding model
Under the traditional mixed funding model, a regular source of grant funding, typically from Arts Council England (ACE), local government, or major Trusts and Foundations, is used to ‘prime the pump’, supporting some core costs and a public programme of activities. The arts organisation then supplements this with a mixture of sponsorship and earned income (for instance from ticket sales). This model worked well at Poet in the City and, by the time I handed over to my successor in 2014, the organisation was generating more than 50 per cent of its annual income from sources other than grant funding. This is itself a great success story. A lot of small arts organisations still find it difficult to significantly match their core grant funding. However, by the time that R&V was launched as a separate organisation in 2014 this approach to growing an arts organisation had effectively disappeared. Severe cuts to overall arts funding saw the number of regularly funded organisations cut dramatically, while smaller project funding grants had become scarcer and insufficient to prime the pump for a new organisation and to help it grow. At the same time other sources of grant funding from public bodies, such as local authorities, effectively disappeared (a few local authorities even cancelled their arts spending altogether). In the case of R&V, even its modest project funding from ACE was withdrawn in 2016. This has left much of the arts sector in an almost impossible position and has created the need for a radically new approach to how the arts are funded.
R&V was a slightly different kind of arts organisation from its inception. It was created to take advantage of a legacy gift of the property at No 8 Royal College Street in Camden, formerly occupied by the French poets Arthur Rimbaud and Paul Verlaine, and so it was always going to be committed to an innovative approach. From the start the organisation and its Board were considering ways in which this promised legacy gift could be leveraged into a more sustainable funding model for the arts. The Board saw the priority as being the development of a viable arts organisation, quite capable of thriving separately from the legacy gift. Rather than a small house museum, the organisation wanted to be a sustainable arts business for which the legacy gift of the property, when it came, would be a bonus rather than a burden. The question from the start was therefore how to establish a successful arts organisation with a decent turnover and a reliable income stream during an age of austerity and cuts.
The absence of investment in the arts
The development of Poet in the City as a new arts organisation between 2006-2014 demonstrated how it was possible to attract all sorts of new income to an under-valued art form, both in the form of corporate sponsorship and earned income. However, it also demonstrated the constraints placed on the ability of arts organisations to diversify their sources of income and successfully develop themselves as sustainable arts businesses. To take just one example, the charity delivered a Thomas Hardy poetry event at Kings Place in London, attracting a near capacity audience of 350 people. The event was held in partnership with the National Trust and featured 5 contemporary Dorset poets commissioned to write new work inspired by Hardy. Relatively cheap to programme, and easy to promote, the event also made a modest surplus, even after the venue had taken its 50 per cent share of door receipts. As a commercially viable event it could have also filled venues in Truro, Gateshead or Manchester. Not to mention events at the numerous National Trust properties associated with poetry. The problem was (and still is) that there is no obvious source of investment available for arts organisations with such shows and a desire to scale them up. ACE touring grants are rarely available and the budgets available for local promotion of touring events effectively require a non-commercial approach to marketing. On the tour Poet in the City did deliver in 2010 (Spoken Word All Stars) the marketing budget per regional event was as low as £200, meaning that the show was completely reliant on the local venue for marketing, supplemented by a little local leafleting in the days preceding the gig. As a result none of the resulting shows aspired to covering their own costs.
R&V was therefore interested from the start in how to address this absence of investment in the scaling of successful content. In its view the answer is simple. The arts must be allowed to function in a more entrepreneurial fashion, empowered to develop new shows, products and services capable of appealing to wider audiences, permitted to earn money from these activities, and allowed to reinvest these profits (or surpluses) in more content. Specifically, what is needed is a form of limited profit investment in the arts, a source of finance allowing arts organisations to develop and grow those areas of their activities capable of making a profit. Experience has shown how not for profit entities such as housing associations are quite capable of delivering high value contracts worth many 100s of millions, whilst still maintaining a charitable purpose. R&V believes that this kind of hybrid not for profit model provides a viable way forward for the arts, allowing it both to pursue its purely artistic and educational objectives and to support these more effectively by creating earned income from those areas of its operations which can be successfully monetised.
For this to happen it is necessary to establish a mechanism by which small and medium enterprise arts organisations (SMEs) like R&V can be empowered to develop such earned income streams successfully. Research by NESTA has revealed a chronic lack of investment in the arts overall, and an almost total absence of micro-finance allowing arts organisations to develop new income streams. It is not possible for such arts businesses, most of which do not have significant assets or cash reserves, to borrow money from banks. Nor can they go to venture capitalists, who are typically looking for high or short-term returns. Access to investment finance on bespoke terms is surely imperative if the arts and culture are to thrive commercially, to operate in a sustainable and resilient way, and to make their proper contribution to society?
A limited profit investment model for the arts?
Fortunately, there is a model suited to arts investment. That is investment which is made on a limited or capped return basis. Under this model, investors can expect to get their money back, and to make a return too, although the return will be limited or modest. In other words, the model requires the sort of responsible investor who is also interested in developing a more resilient business model for the arts, and in growing arts organisations into successful business enterprises.
This kind of investment is best described as ‘patient capital investment’, prioritising the long-term growth of a financially resilient arts business over the high returns associated with more short-term enterprises. It is sometimes described as ‘philanthropic’ investment, although this does not seem quite right. Investment in the arts made on a limited profit basis model could end up generating a higher and more reliable return than many of the speculative and supposedly high-return investments currently attracting private equity investment (for instance in tech start-ups). It is the scale of effort that ensures success, together with the rapid development of products which have proved commercially viable.
I have personally been involved in advocating for such investment for over a decade. In 2010 a position paper which I wrote for the Culture Forum, an elected group of arts leaders, called for the creation of a Limited or Capped Return Arts Investment Fund. This paper led to a campaign to establish such a fund in which I played a leading part over the following four years. This campaign resulted in the establishment of a £54 million Arts Venture Fund in 2014, which should have been a red-letter day for the arts. However, the fund which emerged from this campaign was very different to the fund for which I have been arguing. Rather than simply providing plain vanilla investment finance for SME arts organisations, empowering them to make money from commercially viable products and services, the new fund insists that any investment in the arts should also be able to demonstrate measurable ‘social outcomes’. While worthy in its intentions, this approach massively distorts the work of the arts sector, distracting it from more straightforward activities and products which could earn money for the arts, and forcing it to deliver against arbitrary definitions of social impact. It also considerably undervalues the contribution made by the arts and culture to society as a whole. More to the point, it cannot serve as a model for SME arts organisations simply seeking a source of investment finance to grow the commercially viable elements of their programming, and to generate more earned income. Often accused of being unbusinesslike in their approach it is no small irony that arts organisations are amongst the only entities being impeded from making money without also achieving broader social objectives.
In the absence of a proper arts investment fund, R&V has made the argument for mission-led limited profit investment by itself, directly to the investment community. Since 2017 it has networked with Investment Funds, high net worths (‘HNWs’), Family Offices and investment advisers with a view to promoting the idea of limited profit investment in the arts. In order to demonstrate the effectiveness of this model it has also developed detailed business plan and cash flow forecasts demonstrating how an investment of between £500K and £5 million in a portfolio of arts programming and services would result in a viable arts business after 5 years with a turnover of over £5 million per annum, a business capable of repaying its investors’ capital plus a 2-5 per cent uplift. The assumptions underlying the projections are very conservative. The model for successful commercial growth is a function of scale-ability, ensuring that when a commercially successful show or activity is identified it reaches the widest possible audience and realises the greatest potential profit. R&V has had little success in getting its message across to the investment community as a whole, but it did start to win the hearts and minds of one or two individual HNWs. As a result, it delivered two hybrid or limited profit style projects in 2019 on the basis of private investment and saw its turnover increase rapidly to about £150K in that year. After the arrival of the COVID pandemic in March 2020 these efforts were stymied. Coming out of the crisis in the autumn of 2021 R&V sought to revive this effort by launching an Angel investment club with a view to establishing a limited profit investment capital fund. It has now drawn a line under these efforts for the time being. In the current climate there is simply no appetite for innovative arts investment. What has not changed, however, is the desperate need for the development of the arts sector to be facilitated by such patient capital-style investment. Such investment could serve to unlock much successful arts entrepreneurship which currently receives no encouragement.
The limited profit investment model for the arts is potentially transformative. It does not require the arts organisation to be an undervalued provider of subsidised art services, but effectively turns the whole model on its head. The arts organisation is able to function more like a design agency and rich content generation business, providing commercial services in a wide range of fields. Instead of these earned income strands being a mere add-on to the real business of the organisation, like a gift shop attached to a museum, the income streams can develop naturally on the basis of the amazing ideas, connections and know-how generated by the organisation and its extended community of supporters. R&V believes this approach offers the arts not only a means of sustaining itself commercially, but also a way of connecting more actively with wider audiences, and reminding people from all backgrounds and walks of life that the arts have a vital part to play in their lives. Thus, business success and social objectives are both better achieved.
New income streams for the arts
An important part of the R&V business model is the development of new sources of earned income emerging out of the arts programming of the organisation. It is clear that such diversification in possible. When I was running Poet in the City I developed a public art consultancy which drew on the ideas and knowledge present in the organisation, and worked in partnership with a leading architects practice to create Pope’s Urn, a permanent public sculpture situated on the banks of the River Thames at Twickenham. As well as celebrating poetry as an art form, and commemorating the life of the great poet Alexander Pope in the town where he used to live, this public art commission was also a commercial contract, delivered through a wholly owned subsidiary trading company. It is not unusual for a larger arts charity to deliver trading activities such as merchandising or a café through a subsidiary trading company. But it was almost unheard of for an SME arts organisation to do so, and to do so successfully, and from its own resources alone. The Pope’s Urn contract resulted in a significant surplus for the parent charity. This impressive public art commission represents a great example of how the arts can generate more income while retaining their authenticity and integrity. It is precisely the sort of commercial strand of activity crying out for investment.
The lesson learned by R&V is that there is no reason why an arts organisation should not be a provider of bespoke commercial design services, applying know-how and ideas from the arts to the creation of a range of products and services including such things as corporate learning and development, filmmaking, and fashion design. All of these areas have been the subject of successful R&V pilot schemes. All of them are capable of generating profits for an arts business. And, drawing on the ongoing IP and resources of the arts organisation, they represent potential bread-and-butter income that mitigates some of the risk associated with investments in riskier arts content. All the ingredients that make it up have been shown to work already. What has been missing is the overall strategic investment necessary to create a profitable arts business bringing together the different strands.
An investment bond for the arts?
You might think that it is a good thing for an arts organisation to be promised a legacy gift of a Regency property worth over £1.2 million. However, in the case of a historic property such a gift is immediately problematic. The whole purpose of the gift of No 8 to R&V was to facilitate the creation of a ‘poetry house’ at the property, combining the functions of a museum, educational venue, and community arts hub. It was therefore effectively un-saleable by R&V. Far from representing a net gain for the recipient charity this gift was going to require significant expenditure. Not only would the historic property need to be staffed and maintained in good order, but it would need to be converted for public access and cultural uses. This would almost certainly require a two-storey extension at the rear of the property including a lift to provide disabled access to the upper floors. The National Trust, who I consulted, normally establish a fund equivalent to about 40 per cent of the value of the property, to ensure they can maintain it in perpetuity. R&V therefore needed to raise a significant capital sum if it was to take advantage of the promised legacy, probably something in the order of £500K. And this needed to be on top of (and separate to) any monies that R&V raised to support the development of the arts organisation itself.
R&V’s recommended solution to this problem was an investment bond. This is a device commonly used to unlock the value of an asset which might otherwise remain under-used or unprofitable. R&V was lucky enough to receive pro bono advice on the development of such a bond from a couple of City law firms (Herbert Smith and Clifford Chance). Although the principle behind such an investment is clear (and well-tested) its application to a legacy gift in the arts was (and probably still is) effectively unheard of, especially by an SME arts organisation. But there seems to be no good reason why this should not be done. An investment bond is basically no different from any loan secured over property. The lender requires a loan agreement and an assurance that they will be repaid their capital plus an agreed level of interest at the end of the term. In case of a default they want their loan to be secured over the property on which they are lending. In this case the underlying asset was worth at least £1.2 million, more than enough to secure a loan of £500K over (say) 5 years. In fact the proposal was to assemble a panel of 5 investors each contributing £100K. R&V soon had its first investor interested, a charitable foundation specialising in French cultural studies, with money it needed to invest and in need of a suitable brass plate address. This synergy with the property at No 8 suggested other potential panel investors, perhaps a French perfume brand or a French company interested in occasional meeting space near to the Eurostar terminal at St Pancras, and in an association with two of France’s most important cultural icons.
But what happens at the end of the term when a lender wants repayment? Again, the more familiar world of private property transactions provides the answer. The amount of the loan and interest can be converted into a commercial arms-length mortgage, secured over the property. The function of an investment bond depends on sequencing. It is a device designed to develop (convert or extend) a property now and adapt it to income-generating purposes (even if these activities sit alongside some other strictly charitable purposes). Once the property is being run as a going concern there should be no difficulty in obtaining a mortgage over the property in the normal way, and of sustaining it over a longer term. The ability to repay the bond certainly depends on some income streams being created from the use of the property, but this appears quite do-able. Even in the absence of a thriving café and retail outlet the property could presumably be sub-let to other arts organisations or creatives at relatively benign rates, or hired out for the purposes of filming or hospitality. Even on this basis it seems likely that sufficient income could be generated to sustain interest and capital repayments on the investment bond and on any subsequent mortgage.
The analogy with private property transactions helped to clarify some of the practical issues. R&V’s interest in the property would only become actual on the death of the owner (its benefactor). The legacy gift was embodied in a codicil to the latter’s Will, but he was still very much alive. Again, a neat solution suggested itself from the world of commercial property. It was suggested that the owner create a long lease in the property in favour of R&V (probably for a period of 99 years). In return for a reasonable ground rent R&V would become the occupier of the property. It would be the leasehold interest in the property which formed the basis of the investment bond and any subsequent mortgage, this being a separate and valuable interest in the property. In the event of the owner’s death R&V would become the freeholder and the long lease would simply be absorbed into the title. At the time R&V’s benefactor was saying that he would like to be free of the responsibility for No 8 and this provided him with a way of both retaining the property as an asset during his lifetime and of being free of day-to-day responsibility for it. It also provided a way in which he (as a legacy donor) could enjoy the transformation and use of their property whilst he was still alive. There were, of course, a number of other practical issues to be resolved, but none of them appeared insuperable, and the research proved a valuable learning exercise.
In the end R&V was unable to implement its investment bond. Its benefactor refused to grant the long lease necessary to enable it. It is perhaps unsurprising that benefactors who are used to existing ways of sponsoring the arts might be suspicious of innovative arrangements, even ones which they may benefit from personally. Eventually, in the middle of the COVID pandemic, he also repudiated his legacy gift of the freehold, forcing R&V to defend the public and charitable interest in the property, a transfer of which to R&V now appears unlikely. From the above it may be clear why the withdrawal of the legacy gift was not the unmitigated disaster that it might at first appear. R&V was also freed from the obligation to raise substantial funding in order to maintain and develop the property as required. In the meantime, the scheme for an investment bond remains a perfectly viable tool for an arts organisation (even a small one) which has a similar opportunity to develop an asset for income generating purposes, but which requires up-front investment in order to do so. It remains one of R&V’s most innovative proposals.
Picking winners and cultivating assets?
There is nothing inherently unprofitable about the arts. The arts are quite capable of making a profit or surplus, but cannot be expected to generate the kinds of returns expected by the usual manifestations of venture capitalism, at least not in the short-term. It is perhaps better to describe it as ‘patient capital investment’. It is more analogous with investment in the pharmaceutical sector, where as many as 8 out of 10 start-ups do not result in profit, with the profits all being accrued from a handful of ‘winners’. The arts are rather easier than this. With a very few exceptions (West End Theatre, moviemaking and opera amongst them) arts content can be developed and road-tested quite cheaply, and potential winners identified, before significant expenditure has been incurred.
Another model which shows (by analogy) what can be done is the literary or artistic estate which, by licensing its content or by authorising new commercial uses of its intellectual property rights, maintains a steady and reliable flow of income for the estate. This is exactly the sort of cultivation of existing assets which arts organisations are usually unable to undertake, no matter how potentially lucrative the content is which they are sitting on. With scale also comes a raft of other commercial possibilities from co-branding deals to video, audio and Augmented Reality/Virtual Reality applications, all of which require investment in order to realise their commercial potential.
R&V has set out to be a trusted production vehicle and a pipeline for artistic projects with the potential to make a return. It is this kind of platform (and pipeline) which is missing. The important thing is the vehicle’s ability to develop multiple projects at the same time, that is its ability to spread creative risk. Very few arts organisations, including large ones, can accomplish this spread, and they end up having to put all their eggs in one or two baskets. No wonder the arts have a reputation as certain loss-makers for their investors. No one is prepared to invest with a consistency and on a scale capable of realising a reliable flow of profit from a stable of good earning content. The gap could be filled by an ambitious arts investment fund prepared to invest in new commercially viable content, but no such fund currently exists. Nor is this just a point about funding. In the absence of proper investment, the arts are compelled to remain firmly within their comfort zone, and to programme content in a very conservative fashion. The absence of strategic investment in the arts means that the opportunity to programme more ambitiously and to use the arts to speak to wider audiences about the way we live now is seriously diminished.