Social Impact Bonds 102


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As a follow up to our 2/26/14 webinar, Social Impact Bonds 101, Robert Esposito and Shawn Pelsinger, two NYU Law and Social Enterprise Fellows, joined us to expand upon our original discussion with a deeper look into the growth of SIB's in the Unites States and the implications for the philanthropic sector. Our two experts took us through a number of recent developments around SIB's in the U.S., including the fate of guarantors, the growth of multiple-funding sources, the expanding position of investment banks for financing and the ultimate role of foundations and philanthropy. This was the second webinar in a four-part series with Public Allies.

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Social Impact Bonds 102

  1. 1. SOCIAL  IMPACT  BONDS  201   Shawn  Pelsinger,  Esq.  &  Robert  T.  Esposito,  Esq.  
  2. 2. Overview   ! Quick  Review  of  Social  Impact  Bonds   ! The  Growing  Number  of  SIB  Investors   ! Government  Procurement     ! SIBs  Beyond  the  Social  Sector  
  3. 3. 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  
  4. 4. 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  
  5. 5. Quick  Review  of  Social  Impact  Bonds   Credit:  Social  Finance,  2014  
  6. 6. The  Growing  Number  of  SIB  Investors   !  Single  Investor   !  Private  Investors   !  Government  Investor   !  Service  Provider  Investors   !  Retail  Investors   Overview  
  7. 7. 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  
  8. 8. 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.  
  9. 9. 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    
  10. 10. 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.  
  11. 11. 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%)  
  12. 12. 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    
  13. 13. 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.  
  14. 14. 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  
  15. 15. Government  Procurement   !  Three  Processes  for  Government  Procurement   !  Request  for  Qualified  Intermediary   !  Whole  Package   !  Arranged  Marriage  
  16. 16. 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  
  17. 17. 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  
  18. 18. 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  
  19. 19. SIBs  Beyond  the  Social  Sector   !  Environmental  Impact  Bonds   !  Health  Impact  Bonds   !  Development  Impact  Bonds  
  20. 20. 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  
  21. 21. 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  
  22. 22. 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  
  23. 23. 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  
  24. 24. 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    
  25. 25. 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