Analysis: Newpin social benefit bonds only for wholesale investors

The introduction of social benefit bonds was announced by the NSW Treasurer, Mike Baird, in the state budget brought down in September 2011. At the time, we noted that the bonds would be directed at charitable trusts and philanthropists, rather than mums and dads, and, more particularly, at institutional investors - the typical buyers of bonds.

The bonds draw on the concept of Social Impact Bonds or Pay for Success Bonds, first introduced in the UK in March 2010. The idea is that investors will fund social programs, thereby generating public sector savings.

Typically, the programs will be early intervention or preventative programs that if not implemented would result in considerably greater long-term expense to the community overall. If the programs are successful then investors will get a return on their investment (presumably funded from the implied savings generated). If there are no savings, then investors get no return.

At the time, it all sounded very vague but more details have since become available in the form of the first such bond.

In late March this year, Mike Baird announced the launch of the first SBB, the Newpin SBB. And, on Thursday night, a public launch was held in the offices of AMP.

The Newpin SBBs are being offered by Social Ventures Australia (SVA) and could yield up to 15 per cent while helping to reunite children in care with their families. SVA hopes to raise A$7 million and is already half way there. The offer closes on July 1.

However, investment in the Newpin SBBs is restricted to wholesale investors as defined in section 761G of the Corporations Act, with a minimum investment of $50,000 required.

While SBBs could be attractive to retail investors, Social Ventures Australia is not licensed to sell to retail investors.

The Newpin program is managed by Uniting Care Burnside. The program aims to reunite children in care with their families and also to prevent children from entering into care. There are currently four Newpin centres operating in western Sydney, and the funds raised from the bond issue will be used to fund the operations of these centres, as well as the opening of six new centres across New South Wales.

There are 18,000 children in care in NSW. Newpin has a solid track record of reuniting families through parent education and intensive family support. Last year, Newpin achieved a restoration rate of 75 per cent.

The restoration rate achieved in the future is the key performance indicator that will determine the return investors will get on their investment. Newpin's restoration rate has been lower in the past and has been in the high 60s over the last six months.

While the performance of the four existing Newpin centres is fairly stable, the performance of the six new centres to be opened remains to be seen.

The Newpin SBBs are intended to be a seven-year investment. The maturity date is September 2020.

The NSW government will guarantee investors a minimum five per cent yield on their investment for the first three years. After that, the return will be determined by the restoration rate KPI.

If the restoration is 60 per cent or better, the bonds will pay a 7.5 per cent coupon. If the rate is 65 per cent (the target rate) the coupon jumps to 12 per cent, and if it gets to 70 per cent, investors can earn 15 per cent per annum. However, if these restoration rates are not achieved the bonds can be redeemed after three years, but with only 75 per cent of the principal returned.

If the bonds are not redeemed at this time because of poor performance, poor performance in years four to seven will see 50 per cent of the principal lost.

This is a high-yield investment with commensurate risk attached. However, if the investment does turn out to be a dud, institutional investors should find consolation in the knowledge that their money was lost for a good cause, rather than being lost in the usual fashion.