COMMISSIONING BETTER OUTCOMES INVESTOR WORKSHOPDaria Kuznetsova, Strategy and Market Development Director, Big Society Capital,

December 4, 2015 dkuznetsova@bigsocietycapital.com

ABOUT BIG SOCIETY CAPITAL

Big Society Capital is an independent financial institution with a social mission, set up to help grow the social investment market.

Our remit is to grow the social investment market in the UK. We do this by making capital available to social finance intermediaries who in turn fund frontline organisations.

We also act as a market champion to build understanding and capacity across social enterprises, charities and government around the use of repayable capital in delivering social outcomes

OUR MISSIONTO SUPPORT AND GROW THE SOCIAL INVESTMENT MARKET THROUGH OUR TWO ROLES

• Improving understanding of social investment• Creating a better environment for social

investment, e.g. tax relief• Encouraging more investors to become social

investors• Increasing awareness among charities and

social enterprises that might benefit from social investment

• £104 million drawn down with co-investment by the end of 2014

• General and specialist funds: loans, equity, regional, social issue, community

• Social Impact Bonds• Social Banks• Charity Bonds• Supporting market infrastructure

As an investorAs a market champion

ABOUT BIG SOCIETY CAPITAL

PORTFOLIO AND ONE YEAR PIPELINE

Portfolio

Pipeline• Social Prime (e.g.

WP+)• Charity Bonds

• Social property funds - Transitional - Supported living - Community

4 Scale

Portfolio

Pipeline• Blended capital

targeting sub-£150k loans

• Further regional and social bank investments

1 Small & medium charity finance

Portfolio

Pipeline• Issue focused

partnerships - Corporates

- Foundations & charities• Social Impact Bonds - New funds and platforms• Tech for Good• Innovation pilots

2 Social innovation

Portfolio

Pipeline

• Retail platforms• Crowdfunding match

fund for SITR• Community Assets

3 Participation

NESIC

COMMUNITY SHARE UNDERWRITING

£9.96m max outcome payments£1.65m investment capital

THERE ARE NOW 31 SOCIAL IMPACT BONDS IN THE UK

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2010 2011 2012 2013 2014 2015

Peterborough Prison

Essex Children at edge of Care

GLA Rough Sleepers St Mungos

DWP 1 APM

DWP 1 Stratford DP

DWP 1 Indigo

DWP 1 Triodos

DWP 1 PEF

DWP 2 T&T

DWP 2 Adviza

DWP 2 Prevista

DWP 2 3SC

Manchester Children in Care

Newcastle Ways to Wellness

Worcestershire Social Isolation

IAAM Adoption

GLA Thames Reach

DWP 1 Links 4 Life

Birmingham Children in Care

FCF Local Solutions

FCF Fusion Housing

FCF St Basils

FCF Depaul

FCF The Y/Ambition

FCF Home Group

YEF Futureshapers Sheffiled

YEF Unlocking Potential

YEF Teens and Toddlers

YEF Prevista

FCF P3

Cardiff children in or at the edge of care

Evolution of Social Impact Bond market in UK Observations

• 31 SIBs operational in the UK to date

• More than 50 SIBs in various stages of development

• Certain social issues more appropriate for SIBs than others

• Range of structures

£1.34m max outcome payments£550,000 investment capital

£2.5m max outcome payments£900,000 investment capital

£4.9m max outcome payments£3.1m investment capital

£4.5m max outcome payments£1.5m investment capital

£3.7 max outcome payments£900,000 investment capital

£7.9m max outcome payments£1m investment capital

£3.74m max outcome payments£690,000 investment capital

WHO ARE THE INVESTORS

• Investors can either invest directly or through a specialist fund manager• Range of social and financial return requirements• Range of risk appetite

Foundations• Barrow Cadbury Charitable Trust • Esmée Fairbairn Foundation • Friends Provident Foundation • Omidyar• The Henry Smith Charity • Johansson Family Foundation • LankellyChase Foundation • The Monument Trust • Panahpur Charitable Trust • Paul Hamlyn Foundation • Tudor Trust • The Prince of Wales’s Charitable Foundation• King Baudouin Foundation • Berkshire Community Foundation• Impetus Trust • Montpelier Foundation

Institutional investors• QBE Insurance• European Investment Fund• Great Manchester Pension Fund• Merseyside Pension Fund• Deutsche Bank

Retail Investors

Other Investors• Bracknell Forest Homes• Buckinghamshire County Council

Specialist fund managers• Bridges Ventures Social Impact Bond Fund• Caf Venturesome• Keyfund• Big Issue Invest• Nesta

WHY ARE SOCIAL INVESTORS INVOLVED IN SIBS?

Why are social investors involved in SIBs?

• Social Issue – commitment to tackling social need and achieving better outcomes

• Scaling up innovative interventions - facilitating take up of innovative interventions that could transform existing approaches

• Financial return directly linked to social impact - Financial return is only achieved if social outcomes are generated

• Rigour and focus from hands on & interactive investment approach by investors working in collaboration with delivery bodies

• Capacity building for future PBR-type contracting from central Government or Europe

WHAT IS THE POTENTIAL VALUE OF INVESTOR INVOLVEMENT

Risk sharing SIB delivery

experience and shared learnings

Constructive challenge and

rigorous performance management

Networks and relationships

Additional capacity building for the providers

WHAT ARE INVESTORS LOOKING FOR

Structure and incentives

• Does the outcomes contract and the SIB payment mechanism maximise delivery of impact?

• How robust are the outcome assumptions and are the outcome payments aligned to the intended impact?

• How are risks shared across all parties?

• Are there other external bodies that can influence success? Are there incentives aligned to those of the programme?

• Are there structures to respond to effective performance management?

Proposed Intervention

• What evidence is there for the intervention delivering the target outcomes?

• Do we understand the needs of the beneficiary group and is the intervention appropriately targeting those needs?

Delivery plans

• Do the staff of the delivery organisation (s) have the relevant expertise and skills to deliver the programme?

• Are governance structures robust?

• Is performance management in place?

• Are there data systems in place or are there plans to develop systems?

• How ready is the organisation to ramp up operations?

Local buy in

• Is there buy in for the programme with local partners?

• Are the appropriate partnerships set up to deliver the programme?

• Is the referral pathway clear?

RISK

Commissioner Investor Provider Intermediary

Reputational risk

Financial risk (savings <outcome payments)

Financial risk (cost> outcome payments)

Intervention risk

Execution risk

Demand/Referral risk

Other

INVESTOR LESSONS LEARNT

Development Phase

• Stakeholder buy in• Outcome and cohort

definition• Staged payments• Intervention development• Incentive alignment • Risk sharing

Legal

• Termination clauses• Investor commitment and

caps on liability• Exclusivity of service

provision• Intellectual property rights

over service delivery

Operational

• Ramp up• Data systems• Performance management• Governance• Local buy in• Impact of policy changes

GROUP EXERCISE

TASK IN GROUPS

You are running a fund with investment from Big Society Capital, 2 foundations and a Local Authority Pension Fund

Your mission is to maximise social return whilst returning capital with a small return to your investors. You aim to do this by balancing social impact, risk and return across your portfolio.

You have £500,000 left to invest and there are 3 Social Impact Bond opportunities

Discuss what type of questions you would ask each of the programmes and decide which you would back/

APPENDIX

Provider holds outcomes-based contracts directly. No investor relationship with commissioner

Who are we backing?

Level of outsourced performance management

Direct SIB Intermediated SIB Managed SIB

Typical entity structure

Performance management

Investing in

Service Providers

Investing in

Prime Contractors

Deal origin

Investor-owned ltd co. with Board, which holds main PbR contract, and sub-contracts to service provider

Service providers and investors working with commissioner

Prime contractor working with commissioner

Newly formed prime contractor, which holds PbR contract, and tenders for service providers

Within service provider Commissioned by SPV Provided by prime contractor, which recruits a small team

Example

SIB MODELS

Established service provider bidding for PbR contract

Within service provider

Direct working capital

Typical financing

Provider holds PbR contract directly, but Investor receives agreed share of PbR commissioner payments

Investor loan to service provider, with interest rate tied to contract success

SPV pays revenue to service provider and receives PbR payments directly from commissioner

Prime contractor pays revenue to service provider and receives PbR payments directly from commissioner

Investor pays revenue to service provider and receives PbR payments directly from commissioner

HOW HAS THE SIB MARKET EVOLVED

• Diversity of risk sharing structure

• Different commissioners (central govt, local authority, CCG) and range of social issues – homelessness, youth unemployment, children at the edge of care, long term conditions and others

• Most national SIBs have contract duration of 3 years with locally commissioned SIBs being longer

• Combination of rate card and individual transactions

• Some have funded new innovations with many using SIB mechanism to scale evidenced approaches

• Contract value £1m - £10m with investment requirement usually <£2m

• Range of outcome metrics and evaluation methods (historical, quasi experimental)

• Other than Peterborough, outcome prices have been set per participant and paid when outcomes have been achieved.

• Increasing use of intermediate outcomes

• Biggest challenges have been the availability of measurable outcomes and resource required to set up16