# What are Impact Bonds
This comprehensive publication on Impact Bonds is a derivative of many research papers and works and is based on the outline of the educational tutorial on this subject at The middle Road. The purpose of the report is to share a brief on the evolution of Impact Bonds and outline recent findings especially both the positives and negative aspects of these instruments.
Impact Bonds are recent social innovation instruments enabling private capital within the development sector. Structured as a participative public-private partnership model, involving multiple sets of actors, Impact Bonds started as Social Impact Bonds. Impact Bonds bridge the gap of funding between the public and private sectors and transfer the investment risk to non-governmental players. Built around the public-private partnership model, today globally there are 194 impact bonds contracted with $441M capital paid upfront for implementing the projects or interventions which target specific preventive social outcomes for a financial return. The tool is used to outsource public funding for deterrent social outcomes which public entities might not pursue. Impact Bonds can be divided into two parts i.e. social impact bonds and development impact bonds. Development Impact Bonds are primarily implemented in low- and medium-income countries and the outcome payer is a third party example a donor unlike a government entity for a social development bond. Over a decade various thematic bonds focused on education and healthcare have been contracted. (M: million, T:Trillions).
Social Impact, first implemented by Social Finance is to pay for success or results-based financing payout structure to reward successful interventions within the global social ecosystem.
The middle Road classifies Impact Bonds as part of Sustainable Finance or Sustainable Investing class of social financial quasi derivative instruments focused towards generating social and environmental good along with a monetary return. Impact Bonds are part of alternative investment class. The bond word is a misnomer with payout designed like an exotic European call option with an all or nothing payout (major structures are designed this way). The product is designed to reward outcome-based performance linked to interventions designed to correct market failures. The key aspects of impact bonds include its public-private partnership model, ability to combine social good with a financial return, an exotic call option with a payout liked to a threshold outcome for investors. Many impact bonds include concessional finance that work as grants to cushion first loss of capital.
# The concept of Blending Capital
Payment structuring is a form of blending capital for investors. In order to attract private capital, foundations and charities provide grants which act as cushion at times to take the first loss of capital from interventions. Big Lottery Fund and Bloomberg Philanthropies are two examples of guarantee of loss to investors in the first and second social impact bonds contracted. Senior debt is superior to subordinated debt in terms of receiving cash flows from the project.