Entrepreneurs operate their business selling produce at their local market
Attractive yield: Village Enterprise paid investors annual interest of 8 per cent © Alissa Everett/Village Enterprise

The benefits of a poverty alleviation programme to improve the livelihoods of 95,000 east Africans were felt beyond the communities themselves. Under the terms of the funding deal for the programme, investors received full repayment earlier this year, along with a return equivalent to annual interest of about 8 per cent for the investment period.

It came from the Village Enterprise Development Impact Bond, which was launched in 2017 and based on the social impact bond model pioneered in the UK in 2010. One of the UK-financed social programmes led to an 8.4 per cent fall in reconviction rates among prisoners leaving a Peterborough prison. This result triggered full repayment for investors with a return of just over 3 per cent a year for the term.

But anyone who remembers the excitement surrounding those early days of SIBs might be forgiven for thinking these investments have not delivered on their early promise. They have not scaled as rapidly as some had hoped and remain a tiny proportion of the $35tn-plus sustainable investment market.

However, part of that may stem from confusion around use of the term “bond”.

Women cooking over a fire pit
© Alissa Evertt

Unlike traditional bonds — debt securities in which investors get their money back, along with interest payments during the bond’s lifetime — SIBs offer a pre-determined payment with interest only if a programme’s goals are met. In developing countries, deals are called impact bonds or development impact bonds, but the general principle is the same.

SIBs and DIBs are not tradable assets. Nor are they “social bonds”, which are the same as traditional bonds except that the proceeds must be used to finance projects addressing social issues. Therefore, they are also, and perhaps more accurately, known as “pay-for-success contracts”.

Deals vary globally, but most make payments to investors in stages “to make sure the risks are being managed”, says Avnish Gungadurdoss, co-founder of Instiglio, a consultancy that helped develop the Village Enterprise deal.

But the Village Enterprise deal itself paid investors only once poverty reduction goals had been met. “You had to wait three years to figure out if the outcomes had been achieved,” explains Gungadurdoss.

Avnish Gungadurdoss
Avnish Gungadurdoss, co-founder of Instiglio

SIBs and DIBs can therefore be attractive ways of funding social interventions, particularly for the public sector, as they shift risk from taxpayers to private investors. But scaling up is not easy. They are complex to structure and they require an “outcomes funder” (usually a government or international donor) that is prepared to pay investors when an initiative’s goals are met.

Because payment triggers are tied to the impact of specific social interventions, deals are hard to replicate. In addition, with repayment dependent on clearly defined results, they call for rigorous measurement, which is often beyond the capacity of non-profit organisations.

Given their risks and relatively modest returns, SIBs and DIBs tend to attract investors such as foundations and high-net-worth philanthropists, as well as donor-advised funds (intermediaries that make grants to non-profits designated by their donors).

“It’s mostly philanthropic organisations getting into these models,” says Gungadurdoss. “They’re seeing this as a way of providing the capital but with an expectation of getting it back if the project is successful. So it’s a more sustainable way of leveraging capital than through just donations.”

Tracy Palandjian sees a similar trend. “All our investors are philanthropically motivated,” says Palandjian, who is chief executive and co-founder of Boston-based non-profit Social Finance, sister organisation to the UK’s Social Finance, which designed the Peterborough SIB.

Tracy Palandjian
Tracy Palandjian, chief executive and co-founder of Social Finance

In the US, Palandjian sees potential in “career impact bonds”, which finance upfront costs for low-income students taking the training needed to secure well-paid jobs in sectors such as healthcare, tech and clean energy. Students only repay if they secure a job with a salary above a pre-determined level.

To advance this approach, in 2019, Social Finance launched the Up Fund: an investment fund backed by large US foundations, which supports up to 12 career impact bonds.

“That’s where things are really taking off,” says Palandjian. “It’s getting people the skills to get jobs that pay better. And measurement of their sustained wage increases is a good metric.”

It is this measurability that appeals to Liesel Pritzker Simmons who, via her US-based Blue Haven Initiative — an impact-focused family office that she runs with her husband — is an investor in Social Finance’s Up Fund.

“What I like is the attention to the outcomes and, as an investor, I’m only getting paid if these are achieved,” she says. “I’m very happy to take that front-end risk.”

And, while SIBs may not achieve scale, the deals do attract philanthropists for whom writing a charitable cheque without knowing what it achieves is no longer acceptable.

“We know there are pools of money that could be deployed for evidence-based outcomes,” says Pritzker Simmons. “I don’t benchmark a pay-for-success note to a bond, like a municipal bond. I benchmark it to a grant — and, in that sense, financially these are smashing successes.”

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article