Impact investing is an emerging new asset class that provides opportunities for investors to generate both a financial and a social return. There are numerous examples of this across the globe including the funding of social enterprises in Europe and the US as well as microfinance programs throughout Asia. Social Ventures Australia (SVA) has been active in this area since 2009, when it formed a non-profit syndicate (along with Mission Australia, the Benevolent Society and the Brotherhood of St Laurence) to facilitate the GoodStart transaction, a $165 million acquisition of over 650 childcare centres (formerly owned by ABC Learning which went into administration).
The non-profit, ‘for purpose’ GoodStart syndicate competed with traditional private equity bidders to acquire the early learning centres and was ultimately successful through using an innovative non profit structure and accessing competitive social finance. The $165 million was raised via a combination of secured senior debt (provided by the NAB and Commonwealth Government) and unsecured debt ($22.5 million paying 12% pa over an 8 year term) provided by private social investors. This transaction is one of the largest social finance deals globally, offering the investors both a social return, through the provision of high quality early childhood care and education, and a strong financial return.
In reality, if priced on a fully commercial basis taking into account the credit worthiness of the business at that time, the $22.5 million unsecured debt provided by private social investors would probably have needed to yield closer to 20% pa for the risks involved. So in essence, the investors were willing to accept 12% pa instead of 20% pa knowing that the difference would be a ‘social dividend’ they were contributing.
Following the success of the GoodStart transaction, SVA established a dedicated Impact Investing team in May 2011. In only its first year of operation, the team placed itself at the forefront of the sector with two key achievements: the establishment of the SVA Social Impact Fund, which is investing $8.6 million in social enterprises nationwide; and its appointment as advisor to both Mission Australia and UnitingCare (two of Australia’s highly respected non-profit agencies) on two of NSW's first Social Benefit Bonds (SBB). They’re also known as Social Impact Bonds.
Social Impact Bonds
Social Impact Bonds are another form of impact-investing or social finance. The bonds are designed to raise private capital for preventative programmes which address areas of pressing social need. If the outcome targets are achieved, the government will repay the private funds plus an agreed rate of return. The payment from the government is in recognition of the fact that addressing areas of social need reduces the financial burden on the government, and only paying when targets are met ensures efficient allocation of scarce public resources.
The first Social Impact Bond was issued in the UK in September 2010 to fund a preventative programme that targets recidivism (definition: a tendency to relapse into a previous condition or mode of behaviour, especially a relapse into criminal behaviour) of former inmates at Peterborough Prison. If the programme successfully decreases the rate of recidivism, the government will realise savings through reduced expenditure on corrective services, and will pay a return to investors. The expected return to investors is in the range of 7.5% to 13%, dependent on the decrease in recidivism. However, if the programme is unsuccessful, the investors are potentially exposed to losses.
Although only in its second year the initial indications of the programme are positive and the UK has now launched a further 13 bonds, addressing a number of issues, including homelessness and teenagers in out-of-home care. The development of the market in the UK has been helped by committed funding from the government which will support the creation of up to 20 Social Impact Bonds.
The US has also embraced Social Impact Bonds, with President Obama dedicating $100 million to support bonds in the US. A bond has been designed and launched to reduce recidivism at Rikers Island prison in New York with investment bank Goldman Sachs as the founding investor. Michael Bloomberg’s Foundation provides a guarantee to ensure the investors can lose no more than 25% of their initial outlay.
In 2012 NSW announced a SBB pilot to address the reduction of recidivism and children in out-of-home care and selected three service providers to work with to issue the bonds, as follows:
- UnitingCare Burnside (targeting out-of-home-care) – see Newpin below
- Mission Australia (targeting recidivism)
- The Benevolent Society (targeting out-of-home-care).
SVA is working with both UnitingCare Burnside and Mission Australia on the structuring, financial modelling and fundraising of the SBBs.
Newpin Social Benefit Bond (Newpin SBB)
The $7 million Newpin SBB is Australia’s first Social Benefit Bond and is now being offered to investors by SVA. An investor in these bonds will be funding the maintenance and expansion of an important children’s care program run by UnitingCare Burnside. Over the past four years, the Newpin programme has worked with over 270 families and successfully restored over 120 children previously in out-of-home care to their families.
The expansion of the programme will see more children live safely with their parents. Over the expected seven year term of the Newpin SBB, it is estimated that based on historical performance more than 400 children will be safely returned to their parents. Newpin centres will expand from the current four to a planned 10 locations across New South Wales.
The savings to the NSW Government generated by successfully restoring children to their families will be shared with UnitingCare to fund the delivery of the Newpin programme. The investment returns offered by the Newpin SBB reflect a sharing of these savings. This investment opportunity is a significant milestone in the rapidly developing Australian impact investing market.
Ian Learmonth is Executive Director at Social Ventures Australia responsible for heading up its Impact Investing team.
Please note Cuffelinks has no view on the merits or otherwise of Social Benefit Bonds as an investment and anyone interested should read the Information Memorandum and talk to their advisers to understand the benefits and risks involved.