(January 31, 2014) – The largest ever social impact bond has
been launched, thanks to investments from Goldman Sachs and several
The $27 million philanthropic fund will work to prevent
young men in Massachusetts from going back to jail or prison. If more people
stay out of jail or prison, government funding pays back the donors with a
Goldman Sachs pledged $9 million towards the social impact
bond, and the Kresge Foundation invested a further $1.5 million.
Another $6 million was invested by the Laura and John Arnold
Foundation ($3.7 million), backed by hedge fund billionaire John Arnold, New
Profit ($2 million) and the Boston Foundation ($300,000).
Living Cities, a collaborative of 22 of the world’s largest
foundations and financial institutions, pledged a further $1.5 million.
The Massachusetts Juvenile Justice Pay for Success
Initiative was announced by the state's governor, Deval Patrick, as a
"smart financial solution" to a difficult problem, according to a
report by CNBC.
Non-profit group Roca will work with 929 young men between
the ages of 17 and 23 in the state over seven years by providing personal
outreach, life skills, and employment training to help reduce recidivism.
If the bond achieves its target of a 40% reduction in re-incarceration,
Goldman as the senior lender for the bond and will be paid back the $9 million
plus 5% annual interest. Junior lenders Kresge and Living Cities will be paid
their base plus 2%.
If the bond exceeds its target, the funders can receive a
small return on their funding for assuming the upfront financial risk,
including up to $1 million for Goldman Sachs, according to a document
issued by Massachusetts state.
The Massachusetts programme is Goldman's third social impact
bond investment. The first was when the bank committed $9.6 million in a
partnership with Michael Bloomberg to a New York City jail program in August
The second came last summer, when Goldman partnered with the
United Way of Salt Lake and JB Pritzker to commit up to $7 million to finance
preschool in Utah.
"Social impact bonds offer an innovative way for
public, private, philanthropic, and non-profit actors to come together and
align their skills and resources in pursuit of measurable, positive social
change," said Kristina Costa, an expert on the topic at think tank the
Center for American Progress.
"Like all tools, social impact bonds have
limitations—but I think they have real potential to help move the needle on
some of our country's toughest social problems, from recidivism to chronic
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