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Social Investing for NFPs – Getting ‘Investment Ready’

7 June 2018 at 8:49 am
Kyrn Stevens
In his third and final article on social investing, Kyrn Stevens looks at considerations for not for profits that decide to embark on the social investing journey.

Kyrn Stevens | 7 June 2018 at 8:49 am


Social Investing for NFPs – Getting ‘Investment Ready’
7 June 2018 at 8:49 am

In his third and final article on social investing, Kyrn Stevens looks at considerations for not for profits that decide to embark on the social investing journey.

The first two articles in this series provided a snapshot of social investing, such as social impact bonds, impact investing and shared value, and risks for NFPs.

This article looks at factors NFPs should consider if, despite the risks outlined in my second article, they would like to get “investment ready”.

Starting from scratch

There can be a considerable amount of time and work involved for organisations to develop programs suitable for proactively pursuing social investments.

An NFP could identify an existing program or service they believe is generating a significant positive social benefit.

The program or service should be focused on one particular outcome to make it more readily measurable and attractive to funders.

This program should then be independently evaluated to scope what the benefits are.

For example, whether a youth diversionary program is eliminating or delaying contact with the juvenile justice system.  

Based on this review, the program may then need to be redesigned and expanded to maximise that benefit and operated for a period of time (two to three years) to gather data on its impact, cost per client, etc.

This data can then be combined with the potential client/beneficiary base to calculate the possible savings to government.

Once this stage is reached, the organisation and private funder are well placed to take an unsolicited proposal to government.

Other start up considerations include:

  • clear definition of target population;
  • simple, meaningful and measureable outcomes;
  • ability to deliver on those outcomes;
  • reasonable time horizon;
  • understanding obligations and liabilities of each party to the transaction;
  • government/investor/evaluator support;
  • ability to attract investors;
  • securing insurances;
  • protection of clients;
  • perseverance;
  • good communication between parties; and
  • clear definition of roles.

Type and size

Creating shared value, where social outcomes are core business and support competitiveness, is more prevalent in large, complex social challenges that maximise business outcomes.

Social impact bonds (SIBs) and social impact investing (SII) lend themselves to smaller-scale, program-specific interventions.

Social Ventures Australia’s Elyse Sainty says that “rules of thumb” for SIB viability requires more than 500 beneficiaries, savings to government of more than $20 million and more than $150,000 in outlays during the development phase.

However, beneficiaries overseas range from 22 children and their mothers in Canada to 10,000 youths in the US criminal justice system, with most serving populations of 1,000 people or less.

Durations range from 20 to 120 months, with most lasting three to five years.

Social impact investors and philanthropic funds may be more likely to be interested in projects that maximise social impact and therefore act as patient capital and be more willing to accept sub market returns.

Impact investment allows for a range in the type and size of investment but are well-suited to smaller scale investments such as social enterprises, with one engaged for a small-scale solar electricity project in a remote Aboriginal community.

A recent Australian Housing and Urban Research Institute report into impact investing for housing and homelessness, found that “early evidence suggests that SII may be better suited to less complex social issues and cases”.


Investors are likely to look for not-for-profit partners that have a good organisational capacity.

Sainty says that service providers must be able to demonstrate their capacity and capability to manage the development and delivery of SIBs, with strong governance and financial controls and a record of managing large projects and/or strong growth.

This view is echoed in a Brookings Institute review of the first five years of SIBs that cites the example of one bond service provider having its own research team and three former investment bankers on its staff.

A January 2018 article in Journal of Social Policy found that smaller organisations are missing out on outcome-based funding, with SIBs principally being “awarded to larger third sector organisations deemed to be ‘investment-ready’”.

Organisations with strong organisational capacity are well placed to deal directly with investors and outcome funders, and smaller/less developed ones could look at other strategies to garner that capacity.

Direct engagement may help gear accountability, governance and reporting systems toward the needs of service providers rather than investors or government.


Legal fees in framing agreements have been identified as a challenge in framing agreements in pay-by-results mechanisms.

The development of one SIB in the United States reportedly involved 27 contracts being written and more than 1,100 legal hours billed.

One estimate was for more than $150,000 in outlays during the development phase – fees that will either have to be recouped in performance payments to investors, or ultimately charged to the service provider.

Not for profits and investors may also want to consider the cost of specialist intermediaries, at least in the start-up phase, and independent program reviews could also significantly add to costs along with increased measurement and reporting burdens.

Engaging with social investing may generally lead to increased oversight and administrative costs for service providers.


Organisations may need to shift their culture to one more focused on financial strategies/sustainability and commercialising aspects of their work through fee-for-service payments to help generate income to meet investment costs.

An Australian Senate Economics Committee report found that organisations (understandably) tend to prioritise resources to achieving their missions rather than “developing the financial literacy and organisational capacity for long-term sustainability…” and that when they “do seek finance are often unable to present a robust business case and fail to engage potential investors”.

Investment policies and strategies at board level help organisations become more mature with their financial sustainability.


Investors may want capital protection and early termination requirements to help protect them, by recouping the protected share of their investment regardless of the outcome.

This may also occur at different rates for different investors, where for example senior capital is 100 per cent protected, or 75 per cent protected in years one-to-three and 50 per cent protected after that.

Investors may have the opportunity to terminate the deal at a specified time if outcomes are not met, carrying potential significant risk to service providers and their beneficiaries.  

Social impact bonds, while complex to develop, have a clear process with:

  • a feasibility study;
  • structuring the deal;
  • implement intervention; and
  • evaluate and repay.

Meanwhile, the Journal of Social Policy review of the literature on SIBs recommended longitudinal comparative mixed-method studies of the same services provided by the same providers through SIB and non-SIB funding mechanisms, to assess whether they are delivering “the benefits espoused by their proponents”.

The cost and governance of such studies for any social investing project would also need to be closely considered by service providers.

This article is the third in a three part series about social investing.

See also:

Social Investing – A Snapshot

Social Investing – Friend or Foe?

About the author: Kyrn Stevens has executive experience across the non-profit, private, and government sectors, and completed an MBA thesis on social investing at Sydney Business School, University of Wollongong. He is a senior corporate affairs and marketing professional who has worked in legal services, for a federal regulatory authority, as well as for Australian Red Cross and in Indigenous health. He is also a non-executive director of the Fairy Meadow Community Bank Branch of Bendigo Bank. Contact him through LinkedIn:

Kyrn Stevens  |  @ProBonoNews

Kyrn Stevens is a senior corporate affairs and marketing professional who completed a thesis on social investing for his Executive Masters of Business Administration.

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