Investors impose market discipline on the partnership. They help drive organizational efficiency by requiring that their financial return be determined through a clear measurement methodology. Since the financial risk is transferred to the investors, they must have sufficient information to price the risk they are undertaking. They need robust investment propositions where risks as well as financial and social returns are properly articulated and managed. They require tools that reflect an intermediary’s methodical and careful vetting of interventions and rigorous assessment of nonprofit service providers’ ability to scale their operations. Investors will also need strong indications that the SIB-funded program will be well executed, performance will be tracked regularly, and outcomes will be determined fairly and reliably.
We anticipate that many of the initial investors in Social Impact Bonds (SIBs) will be philanthropically-motivated, or “impact-first” investors, such as foundations and charitable trusts of high-net-worth individuals. However, as the market grows, SIBs will attract many other types of investors who are looking for both social and financial returns. It is also possible that SIBs can be structured in such a way as to attract more mainstream investors. For instance, SIBs that incorporate credit enhancement may appeal to investors with a lower risk tolerance.