Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 13

Social Benefit Bonds: an emerging asset class

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.

 

RELATED ARTICLES

Passive investing has risks too

Chris Joye on why stocks and property are set for a poor year

Through the looking-glass: what counts is not tied to an index

banner

Most viewed in recent weeks

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Welcome to Firstlinks Edition 594 with weekend update

It’s well documented that many retirees draw down the minimum amount required and die with much of their super balances untouched. This explores the reasons why and some potential solutions to address the issue.

  • 16 January 2025

Latest Updates

Investment strategies

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

9 ways to fix Australia's housing crisis

Decades of policy failure have induced a fall in housing affordability. Unless painful changes are made, an underclass will emerge in a society that is supposed to boast the one of the world's highest standards of living.

Shares

Australia: why the chase for even higher dividend yields?

Australia boasts one of the world's highest dividend yielding sharemarkets, providing substantial benefits to investors and retirees. Despite this, individuals often stretch for even more yield, to their detriment.

Shares

MIGA – Make Income Great Again

The Australian sharemarket seems to be rewarding a number of unprofitable companies on the promise of future riches. Yet profits and cashflows still matter, as a recent case study of Domino's Pizza shows.

Shares

Mapping future US market returns

Exceptional returns from the US sharemarket over the past decade have driven by sales growth, margin expansion, rising valuations, and dividends. Predicting future returns requires careful consideration of these factors.

Shares

Read this before you go all in on US equities

US equities rule global markets, but history is littered with examples of markets that seemed invincible — until they weren’t. Diversification will be key for investor portfolios going forwards.

Property

What impact would scrapping stamp duty have on housing?

Increasing house prices pose challenges for housing affordability. This investigates the impact of stamp duty on the property market, and how removing the tax could help address several key issues.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.