Founded in January 2011, Social Finance US is a nonprofit organization dedicated to mobilizing investment capital to drive social progress. Focused on designing public-private-nonprofit partnerships that tackle complex social challenges such as poverty and crime, at the core of their work is the development of Social Impact Bonds (SIBs), drawing upon private capital to fund projects focused on those challenges, while generating social and financial returns for investors.
SEE Change recently spoke with Chief Executive Officer & Co-Founder Tracy Palandjian to discuss the forward-thinking organization she co-founded, its goals and challenges and her uncompromising faith in an innovative tool called the Social Impact Bond.
What inspired you to co-found Social Finance; what is it about your past experience that brought you here?
I started my career in the private sector: private equity in Hong Kong (where I grew up), McKinsey in New York, Wellington Management in Boston and most recently the Parthenon Group in Boston, where I led the Nonprofit Practice. As we worked to bring private sector tools to some of the most committed and innovative organizations in the social sector, I saw that too often, fundraising was the biggest challenge for my clients.
Having straddled the private and nonprofit sectors, I was always frustrated that I couldn’t leverage my investment background for the benefit of my foundation and nonprofit clients or my board work. When I met Sir Ronald Cohen, one of the founders of Social Finance in the UK and the US, in 2008—I saw the opportunity to change the paradigm.
Sir Ronald and I worked to co-author a report with UK-based Bridges Ventures on the impact investing industry, and the project convinced me to rethink the role of the capital markets in enabling social progress, and to explore the opportunity and the need to connect investment capital and the nonprofit sector. Leaving the private sector to co-found Social Finance in the US with Sir Ronald and David Blood (of Generation Investment Management) has been one of my most important life decisions.
Briefly explain the social impact bond – how it works and why it’s so integral to the work you’re doing today
A Social Impact Bond is an innovative financing mechanism designed to raise private-sector capital to expand effective social service programs. SIBs are based on the concept of pay-for-success contracts, which allow government to pay only for results. If a program funded by SIBs achieves successful outcomes, which are defined and agreed upon in advance by all parties to the contract, government repays investors their principal plus a rate of return based on the program’s success in achieving these pre-agreed outcomes. If outcomes are not achieved, on the other hand, government is not obligated to repay investors.
By drawing upon private capital to fund effective interventions designed to address the needs of the underserved, SIBs are core to our mission of mobilizing investment capital to drive social progress. SIBs have the potential to unlock a new and vast pool of investment capital to finance the expansion of effective, prevention-based projects, while focusing on measurable outcomes and generating social and financial returns for investors.
Related to the above, can you offer some success stories of the SIB?
The SIB is a very new instrument, so the final results from on-the-ground experience are not yet in. The worldwide SIB market was born in the fall of 2010 in the UK, when Social Finance UK launched the first SIB. The SIB-funded program aims to reduce re-offending among men who are released from Peterborough Prison. Experienced social sector organizations provide intensive support to 3,000 short-term prisoners over a six-year period, both inside prison and after release, to help them resettle into the community.
If this support reduces re-offending by 7.5 percent or more, the government will repay investors at pre-agreed rates. If it delivers a drop in re-offending beyond 7.5 percent, investors will receive an increasing return of up to 13 percent based upon the program’s success in achieving social outcomes. Investors in the Peterborough SIB are foundations, including the Rockefeller Foundation, and philanthropic-minded individuals.
Since the Peterborough SIB, the market has evolved rapidly. There are now 14 SIBs on the ground in the UK, two in Australia, and two in the US. Most recently, in December 2013 Social Finance announced the launch of the nation’s first state-sponsored SIB in New York. This $13.5 million capital raise is the largest to date globally, and represents the first-ever private placement SIB offering, made available to qualified private and institutional investor clients of Merrill Lynch and U.S. Trust and other impact investors.
This landmark distribution model is an important and exciting development in the field. The SIB will fund a scaling-up of the work of Center for Employment Opportunities (CEO), a world-class provider of evidence-based training and employment programs to recently released individuals in New York State. CEO’s preventative program will assist 2,000 individuals over a four-year service period to break the downward cycle of recidivism while obtaining gainful employment.
What are the primary challenges associated with the SIB attaining greater traction?
The pace of market development in the US has been slow; there are only two full-fledged SIB projects on the ground (although many others are in the pipeline). Our research indicates that market participants are concerned about the slow pace, high costs and long lead time associated with launching these projects. Indeed, there is a distinct early-mover cost of developing the first SIB transactions in the US.
The supply of high-quality, SIB-ready interventions—deal flow, in other words—is limited at present, creating a gap in the pipeline of projects. SIB-ready service providers operate programs with a solid, consistent evidence base and have track records that demonstrate their ability to facilitate successful outcomes for vulnerable individuals. Many other organizations, however, do not track outcomes with the same rigor—limiting the number of potential partners for SIB projects. Also, early-stage transactions have been defined by fairly narrow criteria, such as a five to eight-year time span to measurable outcomes and quantifiable benefits to the public sector, which further narrows the field of potential nonprofit participants.
Another challenge revolves around the constraints of public-sector processes. SIB financing represents a new and significant departure from government’s usual mode of operations, so it requires a heavy investment of time and effort for public-sector officials to develop the appropriate procurement processes, contracts, and legal standards. Especially from the perspective of mainstream impact investors, the deliberate pace of government action may be a serious obstacle to SIB development. Moreover, silos within the public sector as well as uneven data quality pose significant challenges to the SIB market, especially in developing SIB projects that affect multiple levels and/or sectors of government.
Finally, the key to success in the SIB sector is engaging investors and tapping into their vast pool of capital in order to augment the limited resources of government and philanthropy. There is a high level of interest among investors in directing their capital toward investments that offer both financial and social rewards, but translating this interest into tangible investments in new instruments such as SIBs is not straightforward.
Why is collaboration is so important to action? What is most challenging about getting sectors to work together?
Social innovation financing is a multi-stakeholder partnership that brings together cross-sector leaders in pursuit of a common goal. It encourages cooperation across traditional silos to address social problems that are multi-faceted. SIBs won’t work unless investors, nonprofits and government are willing to collaborate, so we have important translation and coordination roles to play among a fairly diverse set of stakeholders.
The challenge is that we need to have clear expectations about our common objectives and clear lines of responsibilities, which makes for complex financial modeling, contracting and project management. However, should partners succeed in aligning, we can deploy a significant new stream of funds to enable top-tier service providers to scale up their programs and reach many more individuals in need. Successful social innovation financing supports lasting change by allocating resources to those programs with evidence of producing meaningful social progress.
What are the organization’s future steps/goals?
Our goals are directed at three sets of activities: building the market, building the firm, and building the instrument. We hope to catalyze widespread usage of social innovation financing products as a public finance tool; foster sector-wide transparency, standardization, and innovation; and launch multiple projects in order to build a successful financial market for social outcomes
Elisa Birnbaum is the co-founder, publisher and editor-in-chief of SEE Change Magazine, and works as a freelance journalist, producer and communications consultant. She is also the president of Elle Communications.