The first got off the ground under Sir Ronald Cohen, a founder of private-equity firm Apax Partners LLP. In 2010, Social Finance, a nonprofit he co-founded, used £5 million ($8.5 million) in philanthropic funds to reduce recidivism among former prisoners near London.
Shortly after that, Massachusetts -- still reeling from the recession that ended in June 2009, and cutting spending on homeless shelters and early-childhood education -- called for ideas on harnessing social-impact funds. The state decided to tackle recidivism and chose Roca’s proposal, citing its record and emphasis on data collection and analysis.
Due Diligence
Third Sector Capital Partners, a nonprofit started by George Overholser, a founding manager at Capital One Financial Corp., helped recruit investors. Goldman did months of due diligence -- visiting Roca and studying its staffing ratios and methods, Phillips said -- before signing on.
In January, Massachusetts announced the deal, called the Juvenile Justice Pay for Success Initiative. Goldman’s $9 million loan included funds from individual investors. Five philanthropies matched that with junior loans and grants, along with $3.3 million from Roca in deferred service fees, for which it will be reimbursed if the program succeeds.
Similar bets are mushrooming. The first SIB deal in the U.S., also funded in part by Goldman, since 2012 has been helping New York City prevent incarcerated youth from committing new crimes. (Goldman’s $9.6 million pledge is 75 percent backstopped by Bloomberg Philanthropies, formed by Michael Bloomberg, majority owner of Bloomberg News parent Bloomberg LP.) Bank of America Corp. is working with New York state on an initiative to rehabilitate older offenders. Crime isn’t the only target: A deal in Israel would give job training to ultra- Orthodox Jewish men, while Massachusetts is planning one to attack homelessness.
Growing Market
With more than a dozen states and municipalities assembling deals, including Republican-led Ohio and Democratic-controlled Colorado, the market will grow to $500 million by the end of next year, from roughly $80 million now, according to the Rockefeller Foundation, a New York-based philanthropy. In addition, President Barack Obama requested $300 million in his 2015 budget to enable more SIB arrangements.
Massachusetts’ bond, the biggest of its sort, marks a shift for governments. Instead of using money to manage chronic challenges such as reoffending criminals, it seeks to prevent them with Wall Street-style risk analysis and numerical targets.
Work Crews