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 Social-impact bonds allow private capital to be funneled into
philanthropic projects usually funded by governments and charities.
Investors receive a return based on whether a project saves public
money by addressing the social issue it targets.
Goldman Sachs <GS.N> helped to fund the first such program in the
United States three years ago, a $9.6 million plan to reduce
recidivism among teenagers at New York's Rikers Island jail.
Last month, the program's third-party monitor, the nonprofit Vera
Institute, pulled the plug. It announced the initiative, originally
intended to run for four years, would shut down in August after
failing to hit its goal to cut repeat offenses by 10 percent.
Goldman lost $1.2 million and Bloomberg Philanthropies - a partner
in the project - lost $6 million, which would have been recouped had
the program met its goals.
Still, the idea of social impact bonds, also called pay for
performance contracts, has appeal for those who continue to
participate in and seek deals in that space, officials at the firms
told Reuters.
"We are certainly not going to distance ourselves from our
explorations into doing social impact bonds because of what happened
here," said Gary Hattem, head of Deutsche Bank's global finance
group. "This is the frontier of something."
Social impact bonds started in the UK as a product to sell to wealth
management clients. There are seven projects in the United States,
out of 40 worldwide, representing over $70 million, according to the
Rockefeller Foundation's social finance group.
The Goldman prison deal was uniquely challenging because of how
difficult it is to reform in the disruptive environment at Rikers,
said John Roman, a senior fellow at the Urban Institute.
Goldman expects to receive initial results from its second social
impact bond, a $4.6 million program launched in 2013 in Utah aimed
at helping children from low-income families in the next few weeks.
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Additionally, the firm has helped fund two other programs - a $27
million initiative in Massachusetts intended to keep juveniles who
have left jail from returning and a $16.9 million program in Chicago
designed to help low-income families prepare their children for
kindergarten.
Northern Trust, which is a senior lender along with Goldman in the
Chicago program, is pursuing opportunities in the social impact bond
space despite the complexity of the transactions, said Connie
Lindsey, head of corporate social responsibility and global
diversity and inclusion at Northern Trust.
"We hope that transaction structuring will become more standardized
and require less time for transactions to close," she wrote in an
e-mail to Reuters. Some projects have taken more than a year to
implement, executives have told Reuters.
Because each social impact bond program is unique and involves
multiple different private, nonprofit and government partners, they
can be complex to set up, said Gwen Robinson, managing director,
community development at Santander Bank, which helped fund a $3.5
million social impact bond to address homelessness in Massachusetts
last year. It may take some time to standardize the process.
"I wouldn't be surprised if it takes five, six or 10 years before
there is real critical mass," she said.
(Reporting By Jessica Toonkel; Editing by Andrew Hay)
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