The Performance Loan We Set at 9% When We Should Have Set at 20%

Of all the recommendations in the “A Fair Share” report, there’s one I keep coming back to. Not the headline recommendation about removing the peg to initial paid-up value, though that’s the big structural change. The one that interests me most is the proposal to increase the performance loan interest cap from 9% to 20%.

Let me explain why.

A performance loan is a hybrid instrument — part debt, part equity. The lender gets a fixed minimum return (like a loan) but can also earn additional payments based on the performance of the business (like equity). For CICs, which can’t issue traditional equity because of the asset lock and dividend cap, performance loans are one of the few ways to offer investors a return that reflects the real performance of the enterprise.

The potential is huge. Quasi-equity instruments like performance loans could bridge the gap between grant funding and commercial debt, providing the patient, flexible capital that CICs desperately need. They could attract a new class of social investors who want better returns than grants but don’t need commercial rates. They could give CICs a financing tool that doesn’t require giving up control or compromising on mission.

But none of that will happen at 9%.

The current cap was set in the 2010 regulations, and it’s disproportionately low. It doesn’t reflect the risk profile of most CICs, which are small, asset-light, and operating in challenging markets. It doesn’t compensate investors for the complexity of structuring a performance loan. And it doesn’t leave enough headroom for intermediaries and advisors to build viable products.

At 9%, a performance loan is barely more attractive than a commercial savings account. At 20%, it becomes a genuine investment proposition. It opens up the possibility of structures that combine a base return with a performance-related element, creating a spectrum of risk and return that can match different investor appetites.

Our survey evidence supports this. When we asked stakeholders about the performance loan cap, the majority agreed that 9% was too low to stimulate meaningful activity. The recommendation to increase it to 20% was one of the most broadly supported proposals in the entire report.

I’m under no illusions about how this looks to outsiders. “Mulkerrin wants to let CICs pay 20% interest” — it sounds like deregulation, like opening the door to usury. But that’s not what this is. The 20% is a cap, not a target. Most performance loans would be structured at much lower rates. The cap just gives room for the innovation that’s currently impossible.

Compare it to the share dividend cap, which is 20% of distributable profits with an aggregate limit of 35%. The performance loan cap is the only one that’s set as an absolute percentage of the investment, which means it’s the only one that genuinely constrains product design. Raise it, and you unlock innovation. Leave it at 9%, and the quasi-equity market for CICs stays dead in the water.

The Regulator asked us to recommend changes that would make a difference. This is one of them. It’s not the flashiest recommendation, and it won’t make the headlines. But it might, in the long run, be the most important one.