SOCIAL  IMPACT  BONDS  201  

Shawn  Pelsinger,  Esq.  &  Robert  T.  Esposito,  Esq.  

Overview  

! Quick  Review  of  Social  Impact  Bonds  

! The  Growing  Number  of  SIB  Investors  

! Government  Procurement    

! SIBs  Beyond  the  Social  Sector  

Quick  Review  of  Social  Impact  Bonds  

!  A  Social  Impact  Bond  is  an  innovaOve  financing  mechanism  for  Pay-­‐For-­‐Success  contracts  that  is  designed  to  shiS  risk  away  from  government,  and  towards  private-­‐sector  capital  to  fund  effecOve  social  service  programs.    The  government  only  pays  if  these  programs  achieve  predetermined,  measurable  goals.  

!  A  SIB  is  a  mul,stakeholder  partnership  in  which  philanthropic  funders  and  impact  investors  –  not  governments  –  take  on  the  financial  risk  of  expanding  proven  social  programs.    Nonprofits  deliver  the  social  program  to  more  people  who  need  it;  the  government  pays  only  if  the  program  succeeds.  –  McKinsey,  Financing  Social  Change  

Quick  Review  of  Social  Impact  Bonds  

!  Key  Features  ! Limited  control  on  how  external  organizaOon  carries  out  task;  

! Government  cooperaOon  with  external  organizaOon;  ! Agreed  upon  target  populaOon  and  success  metrics;  

! Payments  conOngent  upon  hiZng  targets  

Quick  Review  of  Social  Impact  Bonds  

Credit:  Social  Finance,  2014  

The  Growing  Number  of  SIB  Investors  

!  Single  Investor  

!  Private  Investors  

!  Government  Investor  

!  Service  Provider  Investors  

!  Retail  Investors  

Overview  

SIB  Investors:  The  Single  Investor  +  Guarantee  

!  The  Rikers  Island  SIB,  funded  enOrely  by  Goldman  Sachs  Urban  Investment  Group  ($9.3M)  

!  Bloomberg  Philanthropies  guaranteed  75%  of  Goldman  Sachs’  investment  

SIB  Investors:  The  Single  Investor  +  Subordinated  Debt  

!  Goldman  Sachs  provided  an  iniOal  investment  of  $4.6  million.    

!  Philanthropist  J.B.  Pritzker  has  contributed  an  addiOonal  $2.4  million  investment  in  the  form  of  a  subordinated  loan  to  reduce  risk  to  Goldman  Sachs.  

SIB  Investors:  Government  Investor  

!  The  Massachusejs  SIB  !  Juvenile  JusOce  Pay  for  Success  IniOaOve  will  target  at-­‐risk  young  men  in  the  probaOon  system  

! $11.7  million  grant  awarded  by  the  U.S.  Department  of  Labor    

!  The  London  SIB  ! Department  for  CommuniOes  and  Local  Government  (DCLG)  provided  £5M  in  funding  to  improve  outcomes  for  a  group  of  831  persistent  homeless  residents  in  London    

SIB  Investors:  MulOple  Investors  

Closed/Private  Investment  

! The  Peterborough  SIB:  17  investors,  sourced  through  private  relaOonships,  consisOng  mostly  of  private  foundaOons  and  individuals.  

! The  New  York  State  SIB:  First-­‐ever  SIB  offering  distributed  via  a  leading  wealth  management  pla4orm  –  Bank  of  America  Merrill  Lynch  –  to  qualified  private  and  insOtuOonal  investors.  More  than  40  investors  have  parOcipated  in  this  transacOon.  

SIB  Investors:  Private  Investors  

Open  Market  Investments  !  In  Australia:  

!  Restricted  to  wholesale  investors  with  income  >  AU$250,000  or  AU$2.5m  net  worth  

!  The  Newpin  SBB  raised  AU$7M  from  59  investors.    !  The  Benevolent  Society  SBB  raised  AU$10M  in  two  tranches:    "  The  $2.5M  tranche  involves  17  investors  (no  guarantee,  returns  capped  at  30%)  

"  The  $7.5M  tranche  involves  40  investors  including  NRMA  Motoring  &  Services,  Australian  Ethical  Investments  and  Commonwealth  Bank  of  Australia  (investment  capital  guaranteed,  returns  capped  at  10%)  

SIB  Investors:  Retail  Investors  

The  Essex  SIB  

!  The  Allia  ‘Future  for  Children  Bond’  aimed  at  providing  foster  care  was  the  first  opportunity  for  retail  investors  to  become  involved  in  a  SIB  

!  The  Future  for  Children  Bond  was  constructed  of  78%  loan  to  a  social  housing  provider,  20%  investment  in  the  Essex  SIB  and  2%  management  fees.    !  In  order  to  safeguard  against  ill-­‐informed  investor  mistakes,  the  Bond  was  an  ‘advised’  product,  which  meant  that  financial  advisors  had  to  apply  on  behalf  of  investors.  

!  PotenOal  for  crowdfunded  SIBs;  but  concerns  about  scalability  and  which  governmental  enOty  enjoys  savings  benefits    

SIB  Investors:  Private  Investors  

AcOvely  Involved  Investor  

!  Perth,  Scotland  SIB:  Local  investors  have  contributed  between  £5000  and  £50,000  and  are  involved  in  the  intervenOon.    

!  Perth  YMCA  recruited  12  investors  –  all  local  businesses  or  individuals  –  who  were  interesOng  engaging  directly  in  the  project,  providing  both  investment  and  skill  resources.  

SIB  Investors:  Service  Providers  as  Investors  

!  The  Benevolent  Society  SBB  is  an  example  of  a  service  provider  investor  

!  In  the  Massachusejs  SIB,  Roca  has  suggested  it  invest  in  addiOon  to  being  a  service  provider  

Government  Procurement  

!  Three  Processes  for  Government  Procurement  

! Request  for  Qualified  Intermediary  

! Whole  Package  

! Arranged  Marriage  

Government  Procurement:  Request  for  Qualified  Intermediary  

# Examples:  New  York  SIB,  ConnecOcut  SIB  # How  it  works:  

# The  Government  (e.g.,  Department  for  Children  and  Families)  issues  only  one  Request  for  Proposal  (RFP)  seeking  interested  intermediaries  

# The  selected  intermediary  is  then  responsible  for  idenOfying  appropriate  intervenOon(s)  and  service  provider(s)  in  conjuncOon  with  the  Government  

Government  Procurement:  The  Whole  Package  

!  Examples:  Illinois  SIB,  Department  of  Labor  SIB  

!  How  it  Works:    

! Government  awards  grants  to  applicant  groups  with  fully-­‐formed  partnerships  in  place.  This  partnership  must  include  the  roles  played  by  these  four  enOOes:    

" state/local/tribal  government  agency;  " Intermediary;  " investor(s);  " and  independent  outcome  validator  

Government  Procurement:  The  Arranged  Marriage  

!  Example:  Massachusejs  SIB  

!  How  it  Works:  ! Government  issues  a  Request  for  Response  (RFR)  seeking  intermediaries  

! Government  simultaneously  issues  a  second  RFR  seeking  service  providers      

! Responders  may  note  pre-­‐exisOng  partnership  with  other  organizaOons  or  service  providers  

! The  Government  will  not  accept  joint  applicaOons  ! Government  then  arranges  a  partnership  between  selected  Intermediary  and  Service  Provider  

SIBs  Beyond  the  Social  Sector  

!  Environmental  Impact  Bonds  

!  Health  Impact  Bonds  

!  Development  Impact  Bonds  

SIBs  Beyond  the  Social  Sector:  EIBs  

!  Environmental  Impact  Bonds  (EIBs)  

!  MoneOzaOon  of  future  cost  savings  –  the  bedrock  of  SIBs  –  is  already  prevalent  in  environmental  finance  

!  PotenOal  applicaOons  to:  ! Reduced  CO2/GHG  emissions  !  Improved  Water  quality  !  Increased  use  of  renewable  energy  

SIBs  Beyond  the  Social  Sector:  HIBs  

!  Health  Impact  Bonds  (HIBs)  !  May  2013  –  The  first  health-­‐focused  SIB  in  the  US  is  announced  in  Fresno,  California,  which  has  one  of  the  naOon’s  highest  asthma  rates  (20%  of  children)  

!  The  California  Endowment  awarded  Social  Finance  and  CollecOve  Health  $660,00  in  grant  funding  to  launch  an  HIB  aimed  at  improving  the  health  of  low-­‐income  children  with  asthma  

!  Partners  engage  families  of  200  low-­‐income  children  with  asthma  to  provide  home  care,  educaOon,  and  support  in  reducing  environmental  triggers  of  asthma  

!  Savings  accrue  to  the  State,  which  benefits  from  reduced  emergency  treatment  costs  associated  with  childhood  asthma  

SIBs  Beyond  the  Social  Sector:  Development  Impact  Bonds  

!  Similarities to SIBs !  Investors provide funds to implement social

interventions ! Service Providers work to deliver outcomes ! Outcomes Funders, primarily public sector agencies,

repay investors their principal plus a financial return if – and only if – independently verified evidence shows that outcomes have been achieved.

!  DisOnguishing  Features  of  DIBs:  ! External development agencies are needed to provide

the outcome payment, or some portion of it, in partnership with a developing country government  

SIBs  Beyond  the  Social  Sector:  DIBs  

!  “The  Development  Impact  Bond  is  almost  exactly  the  same  as  the  Social  Impact  Bond,  the  hojest  idea  in  social-­‐service  provision  (an  oxymoron  if  ever  there  was  one)  of  the  last  few  years.  One  difference  is  who  repays  investors  if  the  program  succeeds.  With  a  social  impact  bond,  the  government  does.  With  a  development  bond,  payment  would  fall  to  internaOonal  donors  such  as  foundaOons  or  government  agencies  such  as  Britain’s  Department  for  InternaOonal  Development  or  the  U.S.  Agency  for  InternaOonal  Development.”  !  -­‐The  New  York  Times,  June  19,  2013  

SIBs  Beyond  the  Social  Sector:  DIB  Case  Studies    !  Case  Study  1:  ReducOon  of  Rhodesian  Sleeping  Sickness  in  Uganda  

!  Case  Study  2:  AnOretroviral  Treatment  as  PrevenOon  of  HIV  and  TB  in  Swaziland  

!  Case  Study  3:  Low  Cost  Private  Schools  in  Pakistan  !  Case  Study  4:  Access  to  Quality  Secondary  EducaOon  in  Uganda  

!  Case  Study  5:  SME  Pipeline  GeneraOon  and  Value  CreaOon  !  See,  Center  for  Global  Development  &  Social  Finance,  Inves,ng  in  Social  Outcomes:  Development  Impact  Bonds    

Conclusion  &  Review  

!  The  Growing  Number  of  SIB  Investors  

! Government  Procurement    

!  SIBs  Beyond  the  Social  Sector  

!  The  CriOcal  &  Evolving  Role  of  FoundaOons  ! Playing  the  part  of  guarantor,  investor,  intermediary,  and  evaluator