Social impact bonds: relief for class of 2015 in UK
Two new social impact bonds launched in the UK last week are the first to take advantage of social investment tax relief.
The bonds, commissioned by the Department for Communities and Local Government and structured by Triodos Bank, will provide £910,000 to enable four charities to help young people who are homeless or are at risk of becoming homeless find secure accommodation.
The first of the social impact bonds (SIBs) will be taken up by Ambition East Midlands – a newly formed partnership of three local charities including P3, YMCA Derbyshire and The Y. It aims to support 340 young people.
CEO at P3, one of the winners at the 2013 RBS SE100 Awards which celebrate the UK’s top social enterprises, Mark Simms, said: "In the current economic climate charities are having to look for alternative and more innovative ways of sourcing funding.
“We passionately believe that these new services will fundamentally change the lives of young people around the country."
The second of the SIBs will be taken up by Aspire Gloucestershire. This is a partnership between CCP and P3 and will work with 150 young people in the Gloucestershire region, which is in the south-west of the UK.
Reducing risk with tax relief
While the majority of the £910,000 capital raised came from experienced institutional investors Big Issue Invest, CAF Venturesome and the Key Fund, 15% was provided by individual investors benefiting from the Social Investment Tax Relief (SITR) – which was introduced in the UK in chancellor George Osbourne’s Autumn Statment last year.
The SITR turns what is a sub-commercial return into an attractive return so I think it is vital for the sector.
The SITR means that investors will potentially receive an interest rate of 7% per annum, which is equivalent to a 19.3% per annum investment return for the three-year term.
Head of corporate finance at Triodos Bank, Dan Hird, told Pioneers Post: “I think SITR will raise the profile of social investment generally and will encourage more mainstream investors to come into the space and look at social investment opportunities.
“The returns on social investment generally are lower than commercial returns...the SITR turns what is a sub-commercial return into an attractive return so I think it is vital for the sector.”
Nick O’Donohoe, CEO of Big Society Capital, said in agreement, “the social investment tax relief is now really beginning to make a difference” and the announcement of these two new SIBs “shows that it can enable individuals to finance real innovation in our essential public services, while providing the simple loans that charities and social enterprises need."
2015 marks the fifth year since the first SIB was launched in the UK by Social Finance. As of August last year Social Finance reported that 25 SIBs had been commissioned in seven countries, including Belgium, Australia, Canada and Germany.
While the UK leads the way as the country with the most commissioned SIBs, momentum around the financial mechanism is increasing globally, particularly in the US where the largest SIB transactions – of $13.5m in New York State and $18m in Massachusetts – have taken place.
Both of these US SIBs aim to reduce recidivism, but others have a variety of focuses. For example, the Essex SIB in the UK supports vulnerable young people on the verge of being taken into care and the Rotterdam SIB in the Netherlands helps vulnerable people find sustainable employment.
Full steam ahead versus treading with caution
At the launch of the OECD’s report on impact investing in London last week Sir Ronald Cohen, 'the father of British venture capital', recalled a moment during the World Economic Forum’s annual gathering in Davos this year in which Bob Schiller, the Nobel prize winner for economics, said that “he thinks SIBs are one of these innovations that could really transform financial markets and the approach to social issues”.
Cohen also said that “while SIBs aren’t the be all and end all of impact investment...the sector is unlikely to become very successful if they don’t take off” because “they are the expression of connecting the achievement of a social outcome to a return to investors”.
I admire the ambition, but we need a bit of track record...
Triodos Bank’s Hird told Pioneers Post that while it was important for high profile individuals such as those mentioned above to generate media attention and momentum around SIBs, as somebody putting deals together on the ground, he remains wary of generating too much hype around them as a solution to all of the world’s social and environmental ills.
He said: “Most of these SIBs have not yet reached the full course of their three years so we don’t quite know if they’re working yet – whether investors are getting a good return, whether the social outcomes are actually being delivered, etc.
“These guys have to give direction and raise the profiles of SIBs to get social investors interested...and all that is good, but, as a practitioner on the ground, knowing how difficult it is to put these deals together – I admire the ambition, but we need a bit of track record to come through over the next few years before we can really say it’s an asset class or something.”
Pioneers Post also spoke to Dominic Llewellyn, co-CEO at UK-based social investment organisation Numbers4Good, about the challenges in structuring SIBs.
He said: “SIBs mustn’t only be seen as a mechanism for immediate savings but as one that ensures that tough social problems are tackled in new and potentially more effective ways.
“They are a tool for investors, government, charities and social enterprises to tackle poverty. Like all forms of social investment, SIBs are a good servant but a poor master. We must be careful to make sure that charities and social enterprises don't feel alienated when working as part of a SIB but feel understood by investors and empowered to increase their impact.”
Numbers4Good have been involved in the creation of SIBs, including the Fair Chance Fund announced by the government last year, and undertake performance management of these financial structures when required.
Looking ahead, Hird told Pioneers Post that SIBs were very much on the radar for Triodos Bank. “Providing someone is willing to commission these products, we at Triodos are really keen to get involved,” he said.
Photo credit: Kezn Teh