How are social impact bonds structured?

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AcadiFi · Accepted Answer

Social Impact Bonds (SIBs), or Pay-for-Success contracts, are NOT traditional bonds — they're outcome-based contracts where private investors fund a social program upfront and are repaid by a government (or foundation) ONLY if predetermined outcomes are achieved. Structure: (1) government defines a measurable social outcome (e.g., recidivism reduction, homelessness reduction); (2) service provider delivers an intervention; (3) private investors fund the intervention (typically $5-50M); (4) independent evaluator measures outcomes; (5) government pays investors based on achieved outcomes. If outcomes aren't hit, investors lose some or all principal — hence 'at risk' capital. Example: the Harborlight Recidivism SIB launches in 2024 with $22M raised from foundations and impact investors. Servant Hearts Reentry, a nonprofit, provides wraparound services to 1,200 returning citizens. Payment schedule: 0% if recidivism drops <5%; 70% of principal if 5-10% drop; 105% if 10-15% drop; 115% if >15% drop. Evaluator (a research institution) measures outcomes over 4 years. If results hit the top tier, investor IRR ~7%. If miss, investors absorb losses. Benefits: aligns incentives, shifts program risk to private capital, funds proven interventions. Criticisms: high transaction costs, complex outcome measurement, small scale. Globally ~280 SIBs launched since 2010 with mixed results. Think of SIBs as venture-capital-meets-social-policy.

How are social impact bonds structured?

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