Using Private Capital to Solve Social Problems

     The social sector needs an enormous amount of help addressing its problems. In the United States, almost 550,000 people were homeless on one single night in 2016 (1), 12.7% of the population lives in poverty (2) and more than 40% lives with chronic illness (3). 

     Solving these huge problems requires huge amounts of capital. The scale that they have grown to is proof that the government (which, generally speaking, has been historically “responsible” for them) alone doesn’t have the necessary resources. Even though social expenditure costs in the US are close to 20% GDP (4), these trillions of dollars simply aren’t enough. 

     The gap between current spending and what’s needed is so large for two reasons. First, too many existing programs are reactive; remediation is more expensive than prevention, but preventative programs are generally too risky to make it into government budgets. Second, public budgets are shrinking. 

     The answer, then, is twofold: support preventative programs and do so with a funding pool that’s growing. 

     Social impact bonds (SIBs) do both of those things. With SIBs, private funders supply capital for unproven and unscaled programs (delivered by nonprofits) for preventing social problems that would otherwise be the government’s duty to remediate after the fact. The risk is carried by philanthropists and investors who are willing to accept below-market rate returns, which come only if programs are proven to be successful. Those returns are provided by the government, who then takes over the successful program; they’ve avoided the risk of testing a new program while inheriting the long-term savings of prevention.

     It’s important to know that this growing funding pool actually exists. Globally, the private impact investor community committed more than $22B to impact investments in 2016, which is a 45% increase over 2015 (5, 6). New, larger funds like Bain’s $390M Double Impact fund and TPG’s $2B Rise Fund also create a “promise of liquidity” in the impact market by “broaden[ing] the range of possible exits for early-stage investors” (7). This market supports everything from SIBs to socially responsible private companies.

     Interest in both SIBs and impact investing is booming in no small part thanks to the promise of financial gain. With SIBs, there are numerous intermediaries, evaluation advisers, independent assessors, service providers, and investors who stand claim to a piece of the pie associated with the model’s near-term costs. With the impact investment market, its growth itself all but promises not-so-much-below-market rate returns. 

     While it’s acceptable for financial returns to be fueling some of this interest, it is crucially important that impact — that which is built into the very names of SIBs and impact investing — isn’t forgotten in the pursuit of sector growth. It is the duty of SIB administrators and investment managers to prove first and foremost that their homeless, poor, and sick service users themselves are getting larger and larger pieces of the pie, too; not just their organizations and clients.

References:

1.) United States, Congress, Community Planning and Development. The 2016 Annual Homelessness Assessment Report to Congress, Nov. 2016. www.hudexchange.info/resources/documents/2016-AHAR-Part-1.pdf. Accessed 26 Sept. 2017.
2.) United States, Congress, Income, Poverty and Health Insurance Coverage in the United States: 2016, 12 Sept. 2017. www.census.gov/newsroom/press-releases/2017/income-povery.html. Accessed 26 Sept. 2017.
3.) “Chronic Disease Prevention and Health Promotion.” Centers for Disease Control and Prevention, Centers for Disease Control and Prevention, 28 June 2017, www.cdc.gov/chronicdisease/overview/index.htm. Accessed 26 Sept. 2017.
4.) Social Expenditure - Aggregated Data, Organization for Economic Co-Operation and Development, 26 Sept. 2017, stats.oecd.org/Index.aspx?DataSetCode=SOCX_AGG. Accessed 26 Sept. 2017.
5.) Annual Impact Investor Survey 2017. Global Impact Investing Network, May 2017, https://thegiin.org/assets/GIIN_AnnualImpactInvestorSurvey_2017_Web_Final.pdf. Accessed 26 Sept. 2017.
6.) 2016 Annual Impact Investor Survey. Global Impact Investing Network, May 2016, thegiin.org/assets/2016%20GIIN%20Annual%20Impact%20Investor%20Survey_Web.pdf. Accessed 26 Sept. 2017.
7.) Bank, David. What We Know About Bain Capital's $390 Million Double Impact Fund. ImpactAlpha, 18 July 2017, news.impactalpha.com/what-we-know-about-bain-capitals-390-million-double-impact-fund-8dd4e0c90571. Accessed 26 Sept. 2017.