Merrill Lynch and U.S. 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 U.S. Treasury Secretary Lawrence Sommers, Utah philanthropist James Sorenson, hedge fund founder Bill Ackman's Pershing Square Foundation and billionaire investor and oil trader John Arnold, according to the bank.
"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 Monday.
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 U.S. 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 U.S. 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.