21 Jan. 2014 | Comments (0)
The social impact bond (SIB) field is abuzz with the recent news that New York State has issued a $13.5 million contract to increase employment and improve public safety. The deal aims to expand the work of the Center for Employment Opportunities (CEO), a “world-class provider of evidence-based training and employment programs to recently incarcerated individuals in New York State.”
For those new to SIBs, Social Finance USA, a nonprofit dedicated to mobilizing investment capital to drive social progress, defines them as “a specific type of social impact financing in which funds are raised from investors to provide the social service provider with the working capital to deliver their services.” A SIB’s outcome is predicated on robust social impact metrics that are written into the contract. In short, if the project meets its impact goals, the SIB repays investors at a predetermined interest rate. You can read more about SIBs at the Harvard Kennedy School Social Impact Bond Technical Assistance Lab, or at the UK Cabinet Office website.
This new SIB has many features that make it a landmark deal:
- At $13.5 million, it is the largest operational SIB in the world to date.
- It is the first SIB to use a randomized control trial in determining outcome payments.
- It is the first-ever SIB offering distributed via a leading wealth management platform – Bank of America Merrill Lynch – to qualified private and institutional investors.
- It is the USA’s first state-led contract (the only other operational SIB in the USA is led by New York City).
Foundation dollars backing the investment
I have been researching SIBs in recent months and have spoken to a number of people active in the field. What strikes me about this new deal is the fact that The Rockefeller Foundation is providing a first-loss guarantee to protect up to $1.3 million of investor principal (approximately 10 percent of the total investment) if the project does not achieve its social impact goals. The New York City SIB – the first in the USA, worth $10 million – had a similar feature. It was backed to the tune of $7.2 million by Bloomberg Philanthropies, an agreement that encouraged Goldman Sachs’s Urban Investment Group to provide the capital, and propelled that SIB into reality. I got the impression from my conversations that many in the field thought that this support made the contract very unique; to have this backing was hugely advantageous, but it was a model that was unlikely to be replicated. As one expert told me, “Not every city has a Bloomberg Philanthropies available to them.” Yet, here is a new SIB with a portion of the investment—albeit a much smaller portion—backed by a different foundation. The model demonstrates a fascinating way in which foundation dollars can support the growth of the SIB market, and it will be interesting to see whether corporate foundations follow their private counterparts’ lead in future SIB contracts. I will be exploring the role of corporate philanthropy in the SIB market in a forthcoming report this year. If you are a corporate foundation taking part in SIBs, I would love to speak to you. Please email me at Alex.Parkinson@conferenceboard.org.