I googled “Social Impact Bond” ”not a bond” today, and got about 300 results. Although this measure is far from scientific, it does demonstrate that virtually everyone who talks or writes about Pay for Success agrees that the use of the term “Social Impact Bond” is misleading. It’s simply not a bond.
But who cares? Isn’t this just semantics? As Juliet said, “What’s in a name? That which we call a rose by any other name would smell as sweet.”
But we all know what a rose is, we recognize it by its look, smell, and feel (watch out for those thorns). With Pay for Success, we don’t know what its attributes are yet; it is still evolving as a contracting and financing vehicle for improved social outcomes and thus, semantics matter.
Calling Pay for Success a “bond” lays the wrong foundation for our thinking about this innovation, potentially limiting its application and commercial success. By using the name bond we immediately begin to think in familiar terms: Treasury, municipal or corporate bonds.
Bonds carry the promise that the issuer will return the face value of the security to the holder at maturity. Bonds also contain the promise that the issuer will pay the investors a set rate of interest on a set schedule. What the field’s been calling Social Impact Bonds make no such promises.
By thinking in terms of bonds, the issuers and intermediaries who are structuring these financial instruments naturally begin to discuss how to ensure that investors are repaid. This leads to a discussion of risk mitigation, credit enhancement, and loss reserves—interventions that often require financial support from foundations that care about the issue being addressed. Continuing to rely heavily on the limited resources of philanthropy means that the solutions to social ills funded through Pay for Success will never get to the scale needed to really move the dial.
But what if we thought of Pay for Success financings as equity? When investors makes equity investments, they can lose 100% of the principal; this is also true of Social Impact Bonds. The rate of return on an equity investment depends upon the performance of the issuer; this is also true of Social Impact Bonds.
If viewed through this lens, the return on successful Pay for Success deals would be negotiated among the investors, the service providers that produce the intervention, and the government that saves money. It’s too soon in the evolution of Pay for Success to say whether a debt-like or equity-like model holds greater promise. But shouldn’t we be trying both paths? And shouldn’t we be using words that allow us to?