Some cracking stories today from a Penn discussion on the topic through an interesting article worth reading on bonds versus equity as well as some input from Australia too.
Happy reading and have a great weekend:
Fels is proud to bring together many of the Philadelphia region’s impact players with the nation’s thought leaders from the emerging field of social impact investing.
Calling Pay for Success a “bond” lays the wrong foundation for our thinking about this innovation, potentially limiting its application and commercial success. By using the name bond we immediately begin to think in familiar terms: Treasury, municipal or corporate bonds.
Bonds carry the promise that the issuer will return the face value of the security to the holder at maturity. Bonds also contain the promise that the issuer will pay the investors a set rate of interest on a set schedule. What the field’s been calling Social Impact Bonds make no such promises.
By thinking in terms of bonds, the issuers and intermediaries who are structuring these financial instruments naturally begin to discuss how to ensure that investors are repaid. This leads to a discussion of risk mitigation, credit enhancement, and loss reserves—interventions that often require financial support from foundations that care about the issue being addressed.
Social Ventures Australia
They are designed to raise private capital for preventative programs that address areas of pressing social need, and generate attractive financial returns for investors.
Under an SBB, a government contracts with a private-sector financing intermediary or service provider, to fund a social services program. The government pays the bond-issuing organisation or the delivery provider an agreed return depending on achievement of performance targets. Payments are calculated as a function of government cost savings attributable to the program’s success.
The payment from the government recognises that addressing areas of social need reduces the financial burden on the government.
SBBs have several benefits:
Private investors and institutions can invest to help create better social outcomes and receive a financial return
Paying only once performance targets are met ensures efficient allocation of scarce public resources
Service providers are given latitude to determine which services to offer
They enable expansion of services that might not otherwise obtain funding.