What is impact investing?
Impact investing is a hybrid of philanthropy and investment that creates a blend of financial, social and environmental benefits. Impact investments are directed into companies, organizations, and funds with the intent of generating both financial returns and social or environmental impact.
What is a Social Impact Bond?
A Social Impact Bond (SIB) is a type of impact investment designed to raise private sector capital to expand effective social service programs. This mechanism is used to finance a Pay for Success (PFS) contract, which allows government to pay only for results. In such an arrangement:
- Private investors fund a social service program.
- Government repays investors based on the program's success in achieving pre-determined social outcomes.
- If successful, investors can recoup their principal plus a rate of return.
- If the program does not achieve those outcomes, then government is not obligated to repay investors.
SIBs have the potential to unlock a new and vast pool of investment capital to finance the expansion of effective, preventative social services focusing on measurable outcomes and generating social and financial returns to investors.
Is a SIB really a bond?
The SIB is not a traditional bond. Despite their name, Social Impact Bonds differ from municipal bonds and other fixed-income tools that are often used for infrastructure or other capital projects. However, SIBs share features of both debt and equity. The instrument has a fixed term and the upside is capped, but, like equity, returns vary based on performance and investors bear a higher risk of losing their principal. Despite the dissimilarity to typical bonds, SIBs in fact do possess a number of bond-like characteristics, and it is worth noting that bonds are hardly uniform instruments—they come with different features, from zero-coupon bonds to high-yield bonds.
Are SIBs the same as pay-for-success (PFS)?
SIBs are sometimes conflated with pay-for-success contracts, although there are differences between the two terms. While SIBs incorporate the principles of PFS, they are in fact different. PFS refers to a type of contract between government and another entity in which pay is linked to performance. The government may promise to pay a bonus if a road is completed on time; this is a PFS contract, since pay is contingent upon performance. A SIB, by contrast, is a financing mechanism that supports PFS programs; the SIB is used to raise funds to launch a PFS-based project. All PFS-based financing arrangements, including SIBs, fall under the wider umbrella of impact investing.
Why SIBs? Aren’t there other ways to accomplish the same goals?
Governments are increasingly strapped for resources to fund social services; high levels of demand for such services in combination with strained budgets call for innovative approaches. SIBs have the potential to draw in new sources of capital and amplify impact; increase focus on outcomes; encourage government efficiency; foster collaboration among diverse stakeholders; shift funding away from remediation and toward prevention; and facilitate investment in human services.
How is a SIB designed and launched?
The initial impetus for a SIB can come from government, social financiers or entrepreneurs, service providers, intermediaries, or any combination thereof. These partners come together to assess the basis for a viable SIB-financed project, and to design a mutually beneficial program that will appeal to private investors. The partners develop an investment structure and outcomes measurement metrics, raise capital, and use the funds to expand proven interventions. They then conduct rigorous assessment of program outcomes to measure performance, which is validated by an independent evaluator. Finally, the government pays back principal and a rate of return depending on the level of performance achieved, based on the payout schedule that was initially determined by the partners.
How are outcomes measured in a SIB project?
The partners establish metrics that will be used to measure outcomes – such as employment or recidivism rates – as well as a price per outcome based on cost/benefit analysis. This enables them to establish a payout schedule including minimum performance thresholds and maximum payouts.
What happens if the targeted outcomes are not achieved?
Intermediaries work closely with service providers and performance evaluators throughout the project to implement midcourse corrections as needed, to increase the likelihood of positive results. Nonetheless, investors stand to lose all of their capital if outcomes are not achieved. In some cases, partial payments may be made according to a schedule of potential outcomes that was agreed upon by all partners at the outset.
Who are the key partners in a SIB?
A SIB brings together a diverse set of partners who are united by their interest in tapping private capital sources to finance the expansion of successful social service programs. These partners include investors, social service providers and recipients, government agencies, an intermediary, and an independent evaluator.
Who benefits from a SIB?
A SIB benefits all participants by providing:
- Governments with the flexibility to support preventive services, which are often the first services to get cut in hard budget times even though they lead to reduced costs and better outcomes in the long term;
- Taxpayers with the security of knowing that their resources are expended only when solutions produce real results for society;
- Social service providers with the stability of long-term funding sources that enable them to grow and focus on delivering proven, results-oriented services;
- Investors with the opportunity to generate financial returns while putting their capital to work in the service of society; and
- Social service recipients with the highest-quality supports that they need to thrive and reach their full potential.
Who invests in a SIB?
Early-stage SIB investors have been philanthropists and foundations that are interested in achieving both financial and social returns. As the market matures and deepens, SIBs also offer qualified commercial investors – both institutional investors and high net worth individuals -- the opportunity to generate a blend of financial and social benefits.
What is Social Finance’s role in creating a SIB?
Social Finance is a market intermediary. We work closely with all stakeholders – government, service providers, and investors– to develop a financing solution that will meet the needs of our diverse stakeholders, in a highly personalized and interactive process. We specialize in balancing their complex, at times divergent, priorities and structuring transactions that incentivize and benefit all. Our services include transaction support; performance management; advisory work such as feasibility studies and; and market building through education, research, and analysis.
What are the risks of a SIB?
SIBs include a number of risks and are not suitable for many investors. These risks include, but are not limited to:
- Operational risk: the risk that the intermediary and/or service provider will not deliver the expected level of services;
- Performance risk: the risk that performance outcomes will not be achieved;
- Financial risk: the risk that returns will be less than expected; and
- Sovereign risk: the risk that government will take action that adversely affects the outcome of the project.
Where have SIBs been successfully implemented?
In the fall of 2010, our sister organization in the UK launched the world’s first SIB. The program aims to reduce re-offending among men being released from Peterborough prison by financing interventions delivered by experienced social service organizations. Over a dozen SIBs have been launched in the UK since then.
New York City became the first US locality to launch a SIB in 2012. The $9.6 million project aims to reduce recidivism among young men exiting the Rikers Island correctional facility. At this point, numerous states and local governments are in the process of exploring and actively planning SIB programs.
What are the criteria for a successful SIB program?
At Social Finance, we believe that the most promising areas for SIBs are programs that include three key elements: An evidence-based intervention, potential for sufficient net benefits within a time frame that suits the needs of investors, and a model that is replicable and scalable.
What issue areas are best suited for SIBs?
While initial interest in SIBs focused on prison recidivism and homelessness as two promising areas, it is evident that SIBs may be deployed in a variety of additional issue areas. Some promising areas include health care (aging in place, management of chronic illnesses); early childhood education; adult education and workforce skills for hard-to-employ individuals; and nurse home visiting programs.