Social Impact Bonds - Vertrags und Transaktionsstrukturen sowie eingebettete Optionen (Social Impact Bonds - Contractual and Transactional Structures as well as Embedded Options)

72 Pages Posted: 25 Jul 2015 Last revised: 19 Oct 2016

See all articles by Henry Schaefer

Henry Schaefer

University of Stuttgart - Institute of Business Management

Denise Hoechstoetter

University of Stuttgart

Date Written: July 24, 2015

Abstract

German Abstract: Die Integration von Migranten, die Qualifizierung von Kindern mit Lernschwächen oder die Resozialisierung wiederholt straffällig gewordener Jugendlicher sind Beispiele von immer neuen gesellschaftlichen Herausforderungen. In vielen Ländern fehlen hierzu "staatliche Auffangnetze". Aber auch in Deutschland, einem der letzten verbliebenen Sozialstaaten in der Welt, tut man sich immer schwerer, hier die passenden Leistungen anzubieten. Kreativität und Innovation werden in diesem System aber kaum finanziert. Hier soll der Social Impact Bond Abhilfe schaffen. Kurz gesagt, zahlt der staatliche Träger von Sozialmaßnahmen an private Geldgeber das von ihnen überlassene Kapital nebst Zinsen, sofern ein bestimmter vorher festgelegter Mindesterfolg mit den finanzierten Sozialleistungen vom Kapitalnehmer nachgewiesen wird. Wird das Ziel nicht erreicht, müssen die Anleger mit Ertragseinbußen rechnen oder völlig auf eine Rendite verzichten. Das Prinzip soll die Effizienz in der Umsetzung von Sozialleistungen erhöhen und zu innovativen Leistungsangeboten anregen.

Social Impact Bonds haben mit einer herkömmlichen Anleihe wie beispielsweise einer Bundesanleihe nichts gemeinsam. Es handelt sich vielmehr um eine öffentlich-private Partnerschaft und ist für Anleger nicht auf den ersten Blick zu durchschauen. Es sind komplexe Vertragsgebilde mit vielen darin eingebundenen Parteien, die unterschiedliche Aufgaben übernehmen. Chancen und Risiken von Social Impact Bonds haben darüber hinaus hohe Ähnlichkeiten mit Derivaten, vor allem Optionen.

Dies ist das Ergebnis einer Analyse von 14 in den USA und Großbritannien eingeführten Social Impact Bonds. Ans Tageslicht gefördert wurden vielversprechende neue, unterschiedliche Ansätze um vor allem die Wirksamkeit von Sozialleistungen bei den adressierten Zielgruppen zu erhöhen. Trotz aller Vielfalt gelang es, zwei Obergruppen von Social Impact Bonds auszumachen, worunter verschiedene am Finanzmarkt vorfindbare Bonds eingeordnet werden konnten. Im nächsten Schritt wurde erhoben, auf welche Chancen und Risiken sich Anleger beim Erwerb solcher Bonds einlassen. Die Analyse förderte etliche versteckte Eigenschaften zu Tage, die exotischen Derivaten aus dem Optionsbereich ähneln. Vor allem wurden Strukturen entdeckt, die auf eine enge Verwandtschaft von Social Impact Bonds zu sog. Digitaloptionen schließen lassen. Bei solchen Optionen gewinnt der Anleger entweder einen bestimmten Geldbetrag oder verliert seinen Einsatz (zumindest teilweise). Ferner wurde deutlich, dass Social Impact Bonds ganz spezielle Risikoquellen haben, wenn die unter dem Dach des Bonds arbeitenden Partner wie die öffentliche Hand einzelne Sozialdienstleister, Datenmanager etc. nicht optimal miteinander zusammenar-beiten.

English Abstract: Social Impact Bonds have emerged out of nowhere when some years ago in Great Britain a prototype, the Peterborough prison bond, was constructed and attracted a lot of awareness in financial markets as well as in many public authorities of other countries. Currently the number of new Social Impact Bonds around the world has increased in only a few years to more than 60 and their growth rates are above average. Thus the financing of social services in several countries is experiencing new perspectives by the issuance of such bonds. Beside the very general attributes of such bonds as financial instruments that pay a return to investors depending on the success of the financed social enterprise or project, little is known about their conventional parameters of a capital market theoretical based valuation, i.e. return and risks.

The working paper tackles some of these aspects and is organized two folded: In the first part the very nature of Social Impact Bonds as representatives of impact investing related financial contracts is clarified and serves as a basis for a following systematic categorization. On a sample of 14 in the US and the UK issued Social Impact Bonds two general categories are derived, that can serve as frames for differently modified prototypes. The analysis uncovers that Social Impact Bonds represent a very complex nexus of contracts between very different parties like public authorities, social services providers, investors and enablers. The different individual goals of each of these parties, special information sets available for each of them and intransparencies among them can create very special behavioral risks. This part of the analysis demonstrates that Social Impact Bonds have nothing in common with bonds in the manner of straight bonds or related types, which usually can be found in capital markets.   Social Impact Bonds stand much closer to public private partnerships than to traditional lender-borrower relationships. As Social Impact Bonds pay due to the success of the financed social activity they at first glance seem to incorporate contingent claim related components. If the financed project works well with respect to the predetermined impact parameters and quantitative targets, the investor can expect a payment of earnings. If the project fails to achieve the targets, the investor bears in parts the loss as his earnings out of the bond will be cut or in extreme completely omitted. Such a construction in many of the analyzed bonds in practice inspires assumptions of a derivative related structure of such bonds.

The second part of the paper picks up the idea of a contingent claim related financial instrument. It is analyzed how Social Impact Bonds can be understood as financial instruments with embedded options. The analysis uncovered option related structures inside a Social Impact Bonds consisting of very special features. Contrary to the plain vanilla world of financial options Social Impact Bonds differ in two aspects:

1. Social Impact Bonds operate in a setting of cash flow streams that are generated by a real project and not by a financial instrument. That brings such bonds closer to real options as they also operate with non-financial underlyings as they refer to future cash flow streams of real investment projects. Each single Social Impact Bond requires a careful individual analysis of its option structures and their classification compared to financial options.

2. A first classification by analyzing the UK Peterborough Prison Bonds unveiled structures of exotic options and among them predominantly digital options. Referring to the before clarified contractual relationships among the parties of a Social Impact Bond and the embodied informational and behavioral uncertainties, the different nature of stochastic compared to plain vanilla financial options is demonstrated. As it is explained in the paper, the stochastic processes of the generated cash flow in a Social Impact Bond and yet one of the most important value driver of an option is dominated by behavioral uncertainty and only to a very minor part influenced by the usual stochastic processes of financial market based prices. The normal distribution function of stochastic processes therefore seems to be inadequate to determine the risky part of a Social Impact Bond's value.

The results of the working paper should to be understood as a kick off of following analysis that attempt to evaluate single Social Impact Bonds according to their special nature as contingent claims in a real project and related cash flow setting. A growing body of politicians, social service providers and representatives of the civil society favor Social Impact Bonds as innovative instruments to overcome financial shortages in public budgets or to gain more efficiency in the supply of social services. In some countries like the US and the UK the issuance of Social Impact Bonds gains momentum and identifies many new fields for their operations. Investors are often foundations that are willing to cover first losses of financed social ventures. At the moment they are not demanding a rational based evaluation of such bonds according to the standard principles of capital market theory based modeling. But time seems to be ripe to formulate adequate valuation methods to make risk and return inside a Social Impact Bonds transparent and to calculate the fair values of such bonds. As could be observed in the past in other segments of financial markets such a progress stimulates the evolution of new financial instruments and make markets more liquid.

Note: Downloadable document is in German.

Keywords: impact investing, otions, social impact bonds, financial innovations, socially responsible investments

Suggested Citation

Schaefer, Henry and Hoechstoetter, Denise, Social Impact Bonds - Vertrags und Transaktionsstrukturen sowie eingebettete Optionen (Social Impact Bonds - Contractual and Transactional Structures as well as Embedded Options) (July 24, 2015). Available at SSRN: https://ssrn.com/abstract=2635400 or http://dx.doi.org/10.2139/ssrn.2635400

Henry Schaefer (Contact Author)

University of Stuttgart - Institute of Business Management ( email )

Keplerstraße 17
Stuttgart, Baden Wuerttemberg 70174
Germany
++49 (0)711/218460-00 (Phone)
++49 (0)711/218460-09 (Fax)

HOME PAGE: http://www.uni-stuttgart.de/finance

Denise Hoechstoetter

University of Stuttgart ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany

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