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Investments in Investor-Backed Pay For Success (Social Impact Bond) Programs
A growing number of state and local governments are entering into contracts that pay nonprofit or for-profit organizations for success in delivering social outcomes, such as reducing recidivism, homelessness, obesity, or asthma. Among the key players in these pay-for-success (PFS), or social impact bond (SIB) programs are investors who provide working capital to service providers and are repaid to the extent that providers achieve agreed-upon outcomes. The typical investment “stack” consists of for-profit investors and foundations that make grants or invest at concessionary rates and absorb first losses if the provider fails to perform.
This practicum will consider the variety of strategies and instruments for financing social impact bonds, examining the entire spectrum of investments, optimal investment structures, the role of investors in monitoring service providers, and the role of intermediaries in structuring and placing these financial instruments.
Thus far, these arrangements have been one-off, or bespoke, requiring individual crafting that makes them difficult if not impossible to scale. Major barriers to scaling include (1) the transaction costs of negotiating agreements among non-concessionary commercial investors, foundations, and individual philanthropists to assemble the capital necessary to finance a program, and (2) identifying success metrics that are sufficiently clear, measurable, evidence-based, and “non-game-able” that investors can invest with reasonable certainty.
We will initially focus on the problem of outcome metrics. Although such metrics are inevitably specific to different social programs—e.g., youth recidivism and early childhood education—it may be possible to develop metrics that are useable by different government entities adopting similar sorts of programs across the United States. In addition, the early stages of a program financed by a social impact bond may create uncertainties with respect, say, to the processes of enrolling participants. To explore these issues, we will draw on existing examples of SIBs, on the social science literature (and experts) in particular fields, and on the expertise of organizations including Third Sector Capital Partners, Social Finance US, the Nonprofit Finance Fund, and the Social Impact Bond Technical Assistance Lab at Harvard’s Kennedy School.
Our client will be the Nonprofit Finance Fund, founded in 1980, which helps organizations connect money to mission effectively, and supports innovations such as growth capital campaigns, cross-sector economic recovery initiatives and impact investing. See http://nonprofitfinancefund.org/
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