Social impact bond

Financial derivative tied to the performance of a non profit organization

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This is a derivative tied to the performance of a non-profit organisation that is trying to tackle a difficult social problem—in the first instance, reducing the rate of reoffending by young prisoners. Private investors hand money to the selected organisation (including, in this case, a charity, St Giles) which then has the long-term capital to scale up its model without having to spend a lot of time raising funds. Depending on the recidivism rate, the government will pay investors in the first bond a return of 7.5-13%—or nothing, if the promised improvement is not achieved. In many ways the social-impact bond epitomises the new approach to social ills. It provides long-term funds for promising ideas; it transfers risk to private capital markets; and it costs public money only if the scheme provides specific social benefits.

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