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What is a Social Impact Investment?

Social impact investment combines two critical components:

  • Performance-based contracting where government contracts with providers of a given intervention; and
  • Upfront working capital provided by institutional and/or philanthropic investors. 

    SocialImpactFinancing_two_options

Social impact investment has been gaining recognition, with more than 20 states and localities so far pursuing it, because of its ability to meet the “double bottom line” of providing both positive social impact and the potential to generate returns on investment, as well as its focus on paying for outcomes, not activities.

Under this model, impact is measured rigorously and government makes “success payments” based on results; not on activities. This focus on paying for positive social impact, rather than paying for services performed, helps ensure that incentives are properly aligned to achieve social impact and provides a mechanism for government to ensure it pays only for what works. Social Impact Investing mechanisms support Pay for Success programs by providing the upfront working capital required to implement an intervention that is proven to save money over time but requires a significant start-up investment.

This upfront capital investment can be provided by institutional investors as well as philanthropic sources, which typically receive a modest return on investment and the potential for success payments depending on the intervention’s performance. The savings generated by the successful execution of the intervention can be used to repay the investors, and/or can be reinvested into the project, allowing further growth.

CSH's Overview on Social Impact Investment and Supportive Housing is a great primer for understanding this financing model.

 

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