Social impact investments seek to deliver both financial and social returns. Social impact bonds are a form of social impact investment which use a debt or loan structure to provide finance for social investment. Since the launch of the first social impact bond in the UK in 2010, more than 50 bonds have been issued across Europe and North America targeting various social outcomes such as youth unemployment, homelessness, disability, education and renewable technology. Here in Australia, the first two social impact bonds were launched only two years ago by the New South Wales Government.
As one example, the NSW Newpin Social Benefit Bond has delivered positive social and financial returns. The program supported by the bond has to date restored 66 children to their families and prevented a further 35 children from entering foster care. This successful outcome translated into an estimated AUD$66,000 annual cost savings per child to the State Government (the cost of supporting a child in foster care), with qualified investors to receive a 7.5% coupon in the first year and 8.9% in the second year. Positive social and financial returns from the trial bonds have inspired the South Australian and Victorian government to follow the NSW lead.
Major investors for social impact bonds have predominantly been philanthropic organisations, private syndicates and specialized institutional investors. Interest is now growing amongst corporate and financial institutions, including super funds.
Research conducted by Impact Investing Australia has identified that at least AUD$18 billion is expected to pour into local social impact investments over the next five years, although there is still a lack of supply to satisfy investor demand. One of the reasons for this is ‘scalability’, with the majority of deals being typically small and relatively resource intensive.
Reflecting on the NSW Newpin Social Benefit Bond, the Government spent the better part of 18 months finalising an AUD$10 million bond – a lot of work for a relatively small pool of capital, given a project needs to grow big enough to absorb the high transaction costs. Additionally, large institutional investors require frequent performance data, resulting in additional administrative costs. Whilst intermediaries such as social enterprises have been willing to step in and devote time and resources to help project manage the deals, they still need the government and/or large institutional investors to back the deals to lend market credibility.
The impact investment space is still evolving. So far the evolution has focused on institutional investors such as super funds and charitable foundations, with retail investors being notably absent despite popular support. A particular challenge for retail investors is illiquidity in impact investing, which, due to the absence of an established secondary market, means investments are generally locked up for a period of time with limited or no ability for investors to prematurely sell their units.
EIS continues to monitor opportunities for social impact investment for our clients. Eligible EIS clients who wished to participate were able to invest in the NSW Newpin Social Benefit Bond which has delivered positive financial and social returns.