Capital Plus Bonds
The Capital Plus Bond combines a low-risk ethical investment to provide repayment of principal with a higher risk venture investment to deliver social impact and a variable return.
To date the vast majority of social investment activity has been made up of secured lending, with equity and quasi-equity investment representing only 5% of all social investments made in 2010/11. Increasing the supply of capital for higher risk investments is essential to stimulating innovation and growing the market.
We see three main barriers:
- Level of risk can be difficult for investors to determine in the early stages of new markets. This may be particularly true where investment is being sought for the delivery of outcomes-based contracts where the fundamental purpose is to fund innovation in service delivery that the public sector is unable to commission directly.
- It may be difficult to exit from equity type investments resulting in a lack of liquidity.
- Investment opportunities of this kind are often inaccessible for retail investors.
Allia is looking to address these barriers through a Capital Plus bond programme. The bonds will work by lending part of the money invested at fixed interest to a very low-risk social housing provider to create homes and provide services that meet social needs. The repayment of the loan, plus compound interest at the end of the bond, will exactly match the amount invested, meaning investors can have a high level of certainty of receiving back at least what they put in.
The rest of the money will be invested in a higher risk proposition, which may be a specific social venture or a managed fund. The return from this investment will give investors in Allia’s bond an additional return above principal.
In 2012 Allia was awarded a grant of £180,000 by Big Lottery Fund to develop the first Capital Plus bond. The Future for Children Bond launched on 4 February 2013.