SOCIAL IMPACT BONDS 101 Webinar February 26th, 2014 EPIP Host: Michael Barham Speakers: Robert Esposito and Shawn Pelsinger

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Today’s Speakers

•  Robert Esposito, Jacobson Fellow in Law & Social Enterprise, NYU •  Shawn Pelsinger, Jacobson Fellow in Law & Social Enterprise,

NYU

SOCIAL'IMPACT'BONDS'101'

Shawn'Pelsinger,'Esq.'&'Robert'T.'Esposito,'Esq.''

Overview'

!  What'are'Social'Impact'Bonds?'

!  Broader'Context'

!  The'Peterborough'Project'!  Growth'

!  U.S.'Developments'

!  Emerging'Trends'

!  CriOques'

!  Conclusion'

What'are'Social'Impact'Bonds?'

!  “An$arrangement$between$one$or$more$

government$agencies$and$an$external$organiza6on$

where$the$government$specifies$an$outcome$(or$

outcomes)$and$promises$to$pay$the$external$

organiza6on$a$pre>agreed$sum$(or$sums)$if$it$is$

able$to$accomplish$the$outcome(s).”$

!  >Center$for$American$Progress'

What'are'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'hiUng'targets'

What'are'Social'Impact'Bonds?'

!  Common'MisconcepOons'! All'SIBs'are'“PayWForWSuccess”'but'not'vice'versa;'

" SIBs'are'an'innovaOve'financing'soluOon'for'PayWForW'Success'projects'

! SIBs'are'not'bonds'in'the'tradiOonal'sense'" SIBs'retain'both'debt'and'equity'characterisOcs'

! SIBs'need'not'involve'mulOple'thirdWparty'collaborators'" However,'quite'common'for'thirdWparty'parOcipaOon'

What'are'Social'Impact'Bonds?'

Broader'Context'

!  PayWforWSuccess'is'not'a'new'idea'

!  World'Bank/InternaOonal'Development'AssociaOon'PerformanceWBased'Debt'BuyWDown'(+'Social'Impact'Performance'Guarantee)'

!  Department'of'Labor'Workforce'InnovaOon'Fund'(matching'program)'!  $24'million'to'state'level'agencies'in'NY/MA'

!  Department'of'JusOce'Second'Chance'Act'($10'million)'

!  Massachusefs'Social'InnovaOon'Financing'legislaOon'

The'Peterborough'Project'

!  In'2010,'Social'Finance'organizes'first'SIB'!  Broad'Goal:'to'“reduce'reWoffending'amongst'male'prisoners'

leaving'244'HMP'Peterborough'who'have'served'a'sentence'of'less'than'12'months”'

!  Specific'Metric:'ReducOon'of'7.5%'of'exWprisoner'reWconvicOon.'!  Investment:'£5'million'($8'million)'from'17'investors'to'fund'the'

“One*Service”'program'!  IncenOve:'If'the'program'is'successful,'the'UK'government'will'pay'

Social'Finance,'capped'at'$12'million;'individual'returns'range'between'2.5%'and'13%'

!  Measurement:'The'BriOsh'government'and'Social'Finance'agreed'that'independent'researchers'should'determine'whether'the'outcome'is'achieved.'

InternaOonal'Growth'

InternaOonal'Growth'

InternaOonal'Growth'

U.S.'Developments'–'Rikers'Island''

!  In'August'2012,'Goldman'Sachs’'Urban'Investment'Group'and'New'York'City'announced'first'U.S.'SIB'

!  Step'1:'Bloomberg'Philanthropies'will'make'a'$7.2M'grant,'funded'annually'over'4'years,'to'MDRC'

!  Step'2:'GS'will'make'a'$9.6M'senior'mulOple'draw'term'loan'to'MDRC'paid'out'quarterly'over'4'years'

!  Step:'3'MDRC'will'provide'funding'of'$9.6M'paid'out'over'4'years'to'Osborne,'in'order'to'support'the'direct'costs'associated'with'the'program'

!  Step'4:'Vera'will'measure'the'impact'of'the'program'at'12'and'24'month'intervals'post'release'

!  Step'5:'NYC'will'realize'a'stream'of'savings'from'the'decrease'in'recidivism'and'will'make'up'to'two'Success'Payments'to'MDRC'capped'at'$11.7M.''These'payments'will'be'based'on'the'threshold'decreases'in'recidivism'as'measured'by'Vera'

!  Step'6:'Auer'3'years,'MDRC'will'repay'GS'$2.4M'from'the'Success'Payments'or'from'the'guarantee'fund'

!  Step'7:'MDRC'will'repay'GS'the'Success'Payments'and,'if'necessary,'an'amount'from'the'guarantee'fund'needed'to'repay'the'GS'principal'

U.S.'Developments'–'Rikers'Island''

U.S.'Developments'–'Rikers'Island''

Emerging'Trends:'A'FoundaOon'PerspecOve'

!  Rikers'Island'SIB'–'Bloomberg'Philanthropies'provided'75%'guarantee'($7.5'million)'

!  BofAML/NY'State'SIB'–Rockefeller'FoundaOon'provided'a'10%'guarantee'($1.32'million)''

!  Utah'SIB'–'No'guarantee,'but'philanthropist'J.B.'Pritzker'contributed'$2.4'million'subordinated'loan,'reducing'GS'risk'

!  Massachuse<s'SIB'–'No'guarantee'!  California'SIBs'–'The'Nonprofit'Finance'Fund,'with'funding'from'The'James'Irvine'FoundaOon,'announced'$2.5'million'to'incubate'SIBs'in'California'

Emerging'Trends:'Investor'PerspecOve'

Mul>ple'Private'Investors'

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

!  New'York'State:'40'investors,'consisOng'mostly'of'private'foundaOons'and'highWnetWworth'individuals'

!  Australia'(restricted'to'wholesale'investors'–'income'>'AU$250,000'or'AU$2.5m'net'worth):'

!  The'Newpin'SBB'was'launched'first'and'raised'AU$7m'from'59'investors.''

!  The'Benevolent'Society'SBB'raised'AU$10m'in'two'tranches.'The'$2.5m'(no'guarantee'with'up'to'30%'return)'tranche'involves'17'investors'and'the'$7.5m'(capital'guaranteed'with'up'to'10%'return)'tranche'involves'40'investors'including'NRMA'Motoring'&'Services,'Australian'Ethical'Investments'and'Commonwealth'Bank'of'Australia.'

!  Perth,'Scotland:'Investors'have'contributed'between'£5000'and'£50,000'and'are'involved'in'the'intervenOon.'Unique'example'of'combined'investor'+'acOvist.'

Retail'Investors'

!  Essex:'The'Allia'‘Future'for'Children'Bond’'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'illWinformed'investor'mistakes,'the'Bond'was'an'‘advised’'product,'which'meant'that'financial'advisors'had'to'apply'on'behalf'of'investors.'

Single'Funder'(some>mes'with'Guarantor)'

!  Rikers:'Goldman'Sachs'funded,'Bloomberg'Philanthropies'guaranteed.'

State'Funded'(some>mes'with'Guarantor)'

!  Utah:'StateWfunded,'J.B.'Pritzker'guaranteed.'

Service'Provider'Investor'

!  London'Homelessness'SIB'and'the'Benevolent'Society'SBB'both'examples'of'service'provider'investors.'

!  Massachusefs:'Roca'has'suggested'it'invest'in'the'MA'SIB,'in'addiOon'to'being'a'service'provider.'

Emerging''Trends:'EIBs'and'HIBs'

!  Environmental'Impact'Bonds'–'Proponents'argue'that'moneOzaOon'of'future'cost'savings'is'already'a'staple'of'environmental'finance'! PotenOal'applicaOons'to'reduced'CO2/GHG'emissions,'water'quality,'reduced'use'of'fossil'fuels'

!  Health'Impact'Bonds'–'Fresno,'California'pilot'program'to'provide'prevenOve'care'for'children'with'moderate'to'severe'asthma''

Emerging''Trends:'Development'Impact'Bonds'

!  “The'Development'Impact'Bond'is'almost'exactly'the'same'as'the'Social'Impact'Bond,'the'hofest'idea'in'socialWservice'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'

CriOques:'Negligible'Savings'

!  In'addiOon'to'the'fiscal'imprudence'of'accruing'debt'for'social'services,'states'are'generally'restricted'from'creaOng'liabiliOes'in'their'operaOng'budgets'without'providing'matching'funds.'Thus,'it'should'be'no'surprise'that'Massachusefs,'like'the'UK'naOonal'government,'is'preWfunding'its'pilot'SIB'program.'In'New'York'City,'Bloomberg’s'personal'foundaOon'is'providing'a'grant'on'behalf'of'the'government'to'cover'the'payments.'

CriOques:'Lack'of'Scalability'

!  RAND'Europe'found'that'first'SIB'pilot'program'in'Peterborough,'UK'was'“too'small'to'deliver'substanOal'‘cashable’'savings”'for'the'government''

!  Even'for'a'relaOvely'large'reentry'pilot'program'in'Maryland,'a'10'percent'reducOon'of'recidivism'would'at'best'produce'a'6'percent'discount'to'the'cost'of'operaOng'the'pilot'program—using'highly'opOmisOc'assumpOons.'If'the'costs'do'not'stack'up'in'criminal'jusOce,'it'seems'unlikely'they'would'materialize'in'other'types'of'programs.'

CriOques:'Future'of'FoundaOon'Involvement?'

!  FoundaOons'iniOal'involvement'as'guarantors'

!  As'SIBs'gain'momentum,'need'for'guarantors'has'decreased'dramaOcally'

!  Have'foundaOons'just'“primped'the'pump”'for'the'private'sector?'

!  Will'growth'of'SIBs'provide'a'new'investment'opportunity'for'foundaOons?'

CriOques:'Role'of'Banks'in'ProfiOng'from'Public'Service'

!  Prof.'Mark'Ronsenman,'outspoken'criOc'of'SIBs,'argues'that'SIBs'are'undesirable'because'they'allow'banks'to'profit'from'public'services'! Advocates'for'a'“Wall'Street'Sales'Tax”'to'fund'programs'instead'

!  Are'SIBs'ethical'investments?'!  If'government'permits'private'prisons'to'profit'from'incarceraOon,'why'not'permit'banks'and'impact'investors'to'moneOze'future'savings'and'profit'from'recidivism'reducOon?'

CriOques:'Unreliable'Metrics ''

!  Financial'Industry'is'awash'with'metrics'to'measure'a'company’s'financial'performance'

!  Metrics'for'measuring'social'impact'and'performance'are'less'developed'and'less'reliable'

!  Without'accurate'metrics'or'industry'standards,'a'SIB’s'social'performance'may'be'distorted'

!  Will'market'demands'create'reliable'social'performance'metrics?'

Conclusion'&'Resources'

!  Center'for'American'Progress,'Social$Impact$Bonds:$A$Promising$New$Financing$Model$to$Accelerate$Social$Innova6on$and$Improve$Government$Performance'(Feb.'2011),''hfp://www.americanprogress.org/wpWcontent/uploads/issues/2011/02/pdf/social_impact_bonds.pdf'

!  McKinsey'&'Company,'From$Poten6al$to$Ac6on:$Bringing$Social$Impact$Bonds$to$the$US'(May'2012),''hfp://mckinseyonsociety.com/downloads/reports/SocialWInnovaOon/McKinsey_Social_Impact_Bonds_Report.pdf'

!  Social'Finance,'Founda6ons$for$Social$Impact$Bonds:$How$and$Why$Philanthropy$is$Catalyzing$the$Development$of$a$New$Market'(2014),'hfp://www.socialfinanceus.org/sites/socialfinanceus.org/files/Social%20Finance%20White%2'