Action for Children has launched a £1.2m social impact bond to fund foster placements for children in residential care in Manchester.
The charity said the five-year scheme, which has been commissioned by Manchester City Council and funded by the Bridges Social Impact Bond Fund, was the first SIB to fund foster placements.
The project will involve moving an initial group of eight children with challenging behaviour from residential homes to foster placements with the aim of improving their conduct and life chances.
Foster carers will be trained to provide "multi-dimensional treatment foster care", which helps young people with challenging emotional and behavioural difficulties move into family settings.
The scheme aims to work with at least 95 young people over its five-year term.
The council estimated that the scheme could save it up to £4.7m over eight years, and said that if it was successful it could be replicated.
Social impact bonds are funded by investors who are reimbursed and rewarded with dividends if the project is successful but lose money if it is not.
Action for Children already operates a similar scheme, which is not funded by a social impact bond, in Hampshire.
David Derbyshire, director of practice improvement at Action for Children, said the charity was "leading the way in using social impact bonds to open up a valuable source of funding for children’s services and we are committed to working with more local authorities and funders in this kind of arrangement".