Impact investment: The promise of social impact bonds

How do governments persuade taxpayers to fund expensive and unproven social programmes that might save public money in the long run, but the benefits of which (even in a best-case scenario) won’t be apparent for several years? Answer: they don’t, generally. 

Social impact bonds (SIBs) are a new kind of financial instrument intended to help private capital fill this gap. The theory is that investors provide up-front funding for these programmes – which are delivered by specialist providers – and are paid according to how well they work. 

For instance, the first ever such bond, in Peterborough in the UK, was designed to reduce reoffending among released prisoners; so investors will be paid based on the fall in the recidivism rate (or not). 

The attraction for governments is obvious: reducing reoffending saves public money (in terms of law enforcement, prison costs, welfare and so on), so they get better social outcomes at a lower cost. And by sharing some of that financial upside with investors, they can encourage more such schemes. As for investors, it allows them to back projects with a very measurable social impact in a more sustainable way – because they not only preserve their capital but make a return on it (all being well).

Bridges Ventures, a UK-based ‘impact-driven’ investor, has just launched a new Social Impact Bond Fund, which recently held a first close on £14 million (including a cornerstone investment from Big Society Capital, the UK’s new social investment bank). The firm had previously backed three UK SIBs through its Social Entrepreneurs fund (which normally provides quasi-equity to help social sector organisations grow). Since launching the specialist vehicle, it has invested in a fourth SIB, and expects to do around ten more over the lifecycle of the fund.

“We need innovative services and interventions to address growing societal problems, and innovative funding sources to provide the investment,” says Anthony Ross, head of social sector funds at Bridges. “It’s early days, but the opportunity is enormous.”