A tough sell: making social impact bonds an attractive investment

On paper, social impact bonds (SIBs) look like they could easily slot into an institutional investor’s remit for alpha generating, innovative instruments. A closer look reveals that they are likely to be a hard sell. The name is not only misleading, but hard-bitten fund managers will want to see a few more numbers crunched over a much longer period before they consider taking the plunge.

“Pension funds have a fiduciary responsibility to their end clients and they will want to see a clearer picture of the risk/return profile of these programmes.”

Antony Ross

“The main problem with the current structure is that they do not provide a fixed income return,” says Stuart Kinnersley, chief investment officer at Nikko Asset Management Europe. “They are dependent on the success of the underlying programme and do not fit into the requirement of many pension funds. The other issue is they are not scaleable so they will require a lot of work and due diligence for a small investment.”

Kinnersely is not alone in his views. Paul Cheng, founder of SharedImpact – a charity which aims to improve the financial efficiency and effectiveness of charities and social enterprises – also believes it will be challenging to get institutional investors on board. “The name is a misnomer and that can be confusing. It is also difficult to predict cash flows because each programme is different and there is no standardisation. However, it is still very early days and the UK government’s dream scenario is to make it an active asset class over time.”

Existing activity

The UK was a pioneer in the field with SIBs first coming onto the scene three years ago as a new form of financing to offset the swathing cuts in social services. The bond label is not a reference to a coupon or steady income stream but the link between theinvestor and government to fund preventative social projects. To date and perhaps not surprisingly, philanthropists, charitable endowments and foundations are the main players but they will only reap a profit if a specified social outcome is achieved.

St John’s Hospital, a charity providing accommodation, community grants and individual financial support to deprived people in Bath, is looking at SIBs after the Charity Commission said charities can have a mission or programme-related investment and not be in breach of fiduciary duty or charitable objective. Director of support services James Money-Kyrle says: “Many charities are top slicing between 5% and 10% of their investment funds for this social area of work. I think there’s a role for organisations like us in terms of being able to try and help some of those social issues.”

In many ways, SIBs are more akin to a structured product or private equity investment, in that repayment is only possible if the programme is successful. There are currently 14 SIB funded or ‘payment for results’ programmes operating with the Peterborough prison programme being the first to test the waters. Launched in 2010, the goal was to reduce the number of reconvictions among 3000 short-sentence prisoners by 7.5% over an eight-year period. Today, other initiatives include supporting children and young people not in education to employment or training as well as children in care.

The UK has also seen its first dedicated SIB fund – the Bridges Social Impact Fund – launched in April by the Bridges Social Entrepreneurs Fund, which was created in 2009 and has raised nearly £12m for investment in scalable social enterprises, along with the Big Society Capital (BSC), the world’s first social investment bank. The £14m SIB fund which also counts philanthropist group Omidyar Network and social venture fund Panahpur as investors targets charities and social enterprises that deliver programmes to improve social outcomes across a variety of sectors including education, employment, housing and care for vulnerable young people.

The Bridges Social Entrepreneurs Fund has been honing its experience in this area over the past year by leading investments in three payment-by-results programmes under the Department for Work and Pensions’ Innovation Fund. It also teamed up with the BSC to invest in the UK’s first local authority SIB commissioned by Essex County Council to deliver Multi- Systematic Therapy (MST) for 380 vulnerable adolescents at risk of going into care.