'Pay for success' social-impact bonds help train ex-convicts

Social-impact bonds offer investors a more direct connection between the dollars they invest and the impact they have on a social problem.

Tony Avelar / The Christian Science Monitor
Former inmate Jason Corralez poses outside a reupholstering shop in Los Angeles. He served 29 years for second-degree murder before being paroled in 2013. He now works at the shop, which offers employment to ex-convicts. In New York State 'social-impact bonds' are funding a jobs program for 2,000 ex-convicts.

Merrill Lynch and US Trust reached out to some high-powered clients this quarter to invest in a social-impact bond whose proceeds finance a program to lower recidivism rates among ex-convicts in New York.

The project raised $13.5 million over 60 days from clients of the Bank of America Corp-owned brokerage and wealth management firms. Investors included former US Treasury Secretary Lawrence Sommers, Utah philanthropist James Sorenson, hedge fund founder Bill Ackman's Pershing Square Foundation, and the Laura and John Arnold foundation.

"They are looking for new and creative ways ... to have a more direct connection between the dollars they are investing and the impact it is having on a social problem that they care about," Andy Sieg, head of global wealth and retirement solutions at Merrill Lynch, said during a telephone news conference on Dec. 30.

Investors can realize annual returns of up to 12.5 percent over five-and-a-half years, although the probable return is in the high single digits, he said. Actual returns depend on the success of job-training programs for 2,000 newly released prisoners administered by the Center for Employment Opportunities. Success rates will be determined by Chesapeake Research Associates.

The social impact bond is the first pay-for-success instrument in which Bank of America participated, and the first in which a state, New York, is participating. Reducing recidivism will help control prison costs, the fastest-growing budget item in New York in 2012 after Medicaid, Gov. Andrew Cuomo said in a news release.

About 20 pay-for-success bonds have been issued in programs worldwide, but more than 10 US states are considering the programs, said Tracy Palandjian, chief executive of Social Finance Inc., a nonprofit that structures such investments.

The new issue attracted an average order of $350,000 from 40 high-net-worth individuals and from family and other foundations. Capital from investors will come in two stages, this June and again in early 2016.

The funds raised are minuscule compared with the about $12 trillion in US individual investor assets under management and the billions raised weekly in capital markets, Palandjian and Sieg said.

But the Merrill executive said he is confident more transactions will follow at Bank of America and other institutions because of "strong interest by clients in impact investing."

The Rockefeller Foundation provided a $1.32 million guaranty that covers 10 percent of investors' principal should it fail to repay 100 percent of their investment. The Robin Hood Foundation, a nonprofit with strong support from Wall Street and private equity, invested $300,000 in the project.

(Reporting by Jed Horowitz. Editing by Andre Grenon)

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.