Risk funder / risk investor

Somebody has to pay an NPO's bills while it does the work, long before an outcome funder is ready to pay for results. That somebody is the risk funder, also called the risk investor.

The workbook's own words: a risk funder "not only enables financing of operations on a pre-payment basis, but also undertakes the risk of non-delivery of social metrics by the NPO." If the project fails, the risk funder can lose part of its money. If it succeeds, the risk funder gets its investment back, plus a small return.

In one variant of a pay-for-success structure, a bank or non-bank financial company (NBFC) plays this role instead of a typical risk investor, lending working capital to the NPO much as it would to any borrower.

Risk funders bring more than money. The workbook says they bring market discipline — the habit of checking numbers and insisting on proper disclosure — into a part of the economy that has not always had it.

Table 2.1 sets out the risk funder's role in a Development Impact Bond:

Two ways risk capital reaches the NPO, per the workbook:

1. As a risk investor, financing operations on a pre-payment basis and carrying the risk directly, expecting the 4–8% return band if the DIB's targets are met.
2. As a lending partner — a bank or NBFC — providing a multi-year unsecured lending facility instead of a risk investor. Interest payments during the project can be met from an escrowed portion of the outcome funder's money, while principal repayment depends on outcomes being achieved.

Because the credit risk in either structure depends on whether the NPO actually delivers, the workbook says these structures "only work for well-tested programmes that are ready to be scaled up." To reduce that risk further, an intermediary can offer a first-loss default guarantee, agreeing to absorb losses first so other lenders are willing to participate.

Illustrative figures, inside the workbook's 4–8% return band.

Deccan Capital Partners acts as risk funder for a 2-year youth-employment programme run by an NPO, providing Rs 1 crore upfront so the NPO can begin training immediately.

At the end of 2 years, an independent evaluator confirms the programme met its placement targets. The outcome funders then repay Deccan Capital Partners its Rs 1 crore plus 6% — Rs 1.06 crore — a return inside the workbook's 4–8% band.

Had the programme instead placed only 60% of its target intake, the outcome funders would pay out a smaller amount, and Deccan Capital Partners would recover only part of its Rs 1 crore. That downside is exactly the risk a risk funder is paid to carry — the outcome funder's own money was never at stake for an ineffective programme.

Chapter 2 (Social Stock Exchange: Introduction, Funding Structures and Instruments), sections 2.3.1.1 and 2.3.1.2, and Table 2.1, set out the risk funder/risk investor role, its approx. 4–8% return band, and the lending-partner variant using banks or NBFCs. Expect a question on the risk funder's return band, and one distinguishing a risk investor from a lending partner as two ways of supplying the same upfront capital.

• Risk funder pays before; outcome funder pays after. Do not swap them.
• The 4–8% return is approximate and conditional — paid only if the social metrics are met; part of the principal can be lost if they are not.
• A bank or NBFC lending partner is not automatically the same as a "risk investor" — the workbook presents lending partners as an alternative source of the same upfront capital, used "instead of risk investors."
• Do not confuse a risk funder's return with an outcome funder's principal-plus-interest repayment — the risk funder is repaid by the outcome funder, not by the NPO directly.