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$13 Million In Social Investment Bonds Might Pay 12.5%

More than $13 million raised by private and institutional investors will be used to fund a 5½-year program focused on comprehensive re-entry employment services in the world’s largest Social Investment Bond (SIB) to date.

The SIB will provide $13.5 million to expand work by the Center for Employment Opportunities (CEO) over four years in Rochester, N.Y., and New York City. If the program meets certain benchmarks for recidivism and employment, investors will be repaid, with potential returns of as much as 12 percent annually.

CEO is a provider of evidence-based training and employment programs to recently incarcerated individuals in New York State. The funding will cover the full cost of the organization’s programmatic work and core costs. CEO will be able to rely on a flexible, predictable source of funding to expand its program while providing investors an opportunity to align their portfolio and social values. The preventative program will assist 2,000 individuals during a four-year period, starting this month, to break the downward cycle of recidivism while obtaining gainful employment.

“Today’s announcement presents an innovative way of financing social change,” said Andy Sieg, head of Global Wealth and Retirement Solutions for Bank of America Merrill Lynch, which worked with Social Finance, Inc. to define terms of the investment and acted as placement agent.

The $13.5 million raised is miniscule compared to the trillions flowing through accounts in North America alone, said Tracy Palandjian, chief executive officer and co-founder of Boston-based Social Finance Inc., but she’s hopeful and optimistic that this transaction is part of a growing trend to raise capital to address social problems.

The investment was available only to qualified high net worth and institutional clients of Merrill Lynch and U.S. Trust, as well as investors identified by Social Finance Inc. Investors were required to have investable assets of at least $10 million, with a minimum investment of $100,000. Among the more than 40 private and institutional investors were former U.S. Treasury Secretary Larry Summers, James Sorenson and the Laura and John Arnold Foundation, he said. The average investment is about $300,000, with an even split among individual and institutional investors. Institutional investors were largely personal foundations or established foundations.

The maximum return possible to investors will be 12 to 12.5 percent annually but in looking at data sets provided by CEO, Weig said they discussed with investors a probable return in the high single digits.

For investors to be repaid, the project must reduce recidivism by at least 8 percent and/or increase employment by at least 5 percent. If the program performs better than the target goals, investors can earn a positive return on their investment that is proportionate to the savings and benefits achieved by the public sector. No payment is made if the program does not meet goals, ensuring that taxpayer dollars are only spent if a meaningful impact was attained.

If the project achieves all performance measures, the public sector would realize $7.8 million in savings.

The United Kingdom launched the first Social Impact Bond (SIB) several years ago, according to Palandjian, and since then there have been about 20 globally but only one in the United States. This transaction is the first state-led SIB but also the largest amount of capital raised to date.

The timing of late December was driven predominantly by the state, work the state has been doing in partnership with the U.S. Department of Labor, Weig said, adding that the offering was made over the course of the past 60 days.

The U.S. Department of Labor will provide outcome-based payments for the benefit of investors for the first half of the program (first 1,000 served), while New York State will make such payments for the second half of the program (next 1,000 served).

The Rockefeller Foundation will provide a guarantee to protect up to $1.3 million of investor principal, about 10 percent of the total investment, and The Robin Hood Foundation committed to a $300,000 investment. Chesapeake Research Associates will validate the result of a Randomized Control Trial (RCT) that measure outcomes for participants. Investors may lose all of their investment if the program does not meet certain measures of success.

“This public-private partnership applies financial innovation to achieve a common goal: increase employment and improve public safety in New York,” said Palandjian. “The investment is focused on directing resources toward prevention, tackling the source of the problem rather than treating the symptoms, and equipping people with training to help them lead productive and healthy lives,” she said.

“This project is a win-win for our state, facilitating the re-entry process of individuals into the community by boosting employment opportunities and thereby reducing recidivism rates, but requiring payment for services only if these goals are met,” said Gov. Andrew Cuomo. “By assisting these individuals, who are often at risk of becoming repeat offenders, to become productive members of society, we can make New York’s communities safer and more prosperous for years to come,” he said.

In September, New York received a $12-million grant for the project, the largest award made by the U.S. Department of Labor under its national competition for Pay for Success. Additional funds were included in the 2013-14 state budget.