Federal Reserve Bank of San Francisco

Community Development

Social Impact Bonds: Using Impact Investment to Expand Effective Social Programs

Author(s): Luther Ragin, Jr., Global Impact Investing Network and Tracy Palandjian, Social Finance Inc.

April 2013

Community Development Investment Review

To address the wide-ranging challenges facing the United States, collaboration among philanthropy, government, and the investment community is vital. Social impact bonds (SIBs) offer a new way to advance cross-sector partnerships and introduce innovative financing solutions to scale proven preventative social programs. SIBs operate at the intersection of three important trends: greater funder interest in evidence-based practices in social service delivery; government interest in performance-based contracting; and impact investor appetite for investment opportunities with both financial returns and social impact. This article focuses on how impact investors in SIBs can help drive improved performance in the U.S. social sector while providing growth capital to effective nonprofit or social enterprise social service providers. The true power of SIBs lies in the discipline that investors can bring to the process of provider selection and delivery of social services. When government, investor, and provider expectations are aligned, SIBs have the potential to bring significant new capital and efficiencies to social service delivery.

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