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Networking for Success

Networking for Success

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The Council on Foundations and the Center for American Progress jointly held two roundtable conversations in 2013 with potential social impact bond investors, concluding that strong cross-sector relationships are key to social impact bond transactions.
The Council on Foundations and the Center for American Progress jointly held two roundtable conversations in 2013 with potential social impact bond investors, concluding that strong cross-sector relationships are key to social impact bond transactions.

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Published by: Center for American Progress on Mar 03, 2014
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06/19/2014

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1 Center for American Progress | Networking for Success
Networking for Success
Building Networks Is Essential to Investment in Social Impact Bonds
By Kristina Costa and Laura Tomasko March 3, 2014
Social impac bonds󲀔someimes known in he Unied Saes as “Pay or Success” agreemens󲀔are as complex as hey are innovaive. Social impac bond agreemens require cooperaion beween governmen agencies, social service providers, impac invesors, and exernal organizaions󲀔someimes called inermediaries.
1
 Aligning he ineress o so many disparae acors is no easy ask, bu par o he appeal o social impac bonds lies in he benefis o geting differen secors o cooperae and work ogeher o achieve beneficial social oucomes.
Social impact bonds, or SIBs, are an innovative new financing mechanism for social programs in which government agencies pay for programs that achieve specific social outcomes—but only after those outcomes have been achieved and verified. Nongovernmental investors pay the upfront costs of the programs in exchange for a return on their investment if the programs are successful. Under these arrangements, a government agency defines an outcome it wants to see achieved relative to a specified population over a set period of time—for instance, a reduction in the rate of recidivism by 10 percent over five years among nonviolent offenders in a prison system. The govern-ment agency contracts with an external organization that pledges to achieve the specified outcome or outcomes and promises to pay an agreed-upon sum if the organization is successful. The external organization then raises money from socially minded investors to fund social service providers. If the outcome is achieved, the government agency pays the external organization, and the investors receive a return on their principal. However, if the outcome is not achieved, the govern-ment pays nothing. SIBs first took root in 2010 in the United Kingdom, where they are currently being used to finance interventions to reduce recidivism and homelessness, among other issues.
2
 In the United States, ex-perimentation with social impact bonds has begun. New York City and Massachusetts have used them to attempt to reduce recidivism among juvenile offenders, and Utah has announced it will use them to expand access to early childhood education.
3
 The state of New York has launched a social impact bond to reduce recidivism, but it is also looking to improve workforce outcomes for adult offenders.
4
 
What are social impact bonds?
 
Government agencyExternalorganization
Sets outcome,timeline,payment level
ServiceproviderInvestorInvestorServiceproviderBeneficiary population
Pays if and only if outcomeis acheivedPaid return if outcome is achievedProvides workingcapitalHires andmanagesRun interventionsto achieveoutcomeProvidesdirect grantsto fundactivities
 
2 Center for American Progress | Networking for Success
Collaboraion, when done well, allows organizaions o pool resources and experise, hereby achieving more ogeher han any one insiuion could achieve on is own. Beore conracs are signed and work begins, organizaions mus come ogeher o explore wha i migh look like o work ogeher. Many acors deermine wheher a program will succeed or ail, paricularly when i involves aligning differen ypes o organizaions, each wih is own accounabiliy srucure, financial and human-capial resources, and insiuional goals.  As ineres in social impac bonds coninues o accelerae across he Unied Saes and around he world, many insiuions are considering wheher and how o ake advanage o his new innovaion in social finance. Limied daa on he effec o social impac bonds exis, since he firs projecs ha made use o SIBs are sill underway. For example, he firs such agreemen in he world launched in he Unied Kingdom in 2010; his projec o reduce recidivism among nonviolen offenders a HM Prison Peerborough is no ye complee.
5
 Furhermore, social impac bonds also carry considerable risks, especially or inves-ors. Even oundaions wih long hisories o assessing social impac ace challenges in assessing a given social impac bond deal. Poenial invesors are sill developing imporan quesions: How can an invesor apply due diligence o an unproven financial insrumen unding social inervenions, as such insrumens are ofen difficul o scale or replicae even in he mos capable hands?  Wihou adequae grounding in evaluaion mehodology, how can an invesor judge he evidence base o a program i’s being asked o finance? How can an invesor be cerain ha governmen will ollow hrough wih is suppor o a successul social impac bond, especially i he erm o he deal sraddles an elec-ion year? o dae, he invesmen size o mos social impac bonds has been relaively small󲀔less han $20 million. Te firs in he Unied Saes, in New York Ciy, was financed wih $9.6 million rom Goldman Sachs.
6
 Bu as social impac bonds become larger and more com-plex, many deals will rely on muliple invesors rom differen ypes o financial insiu-ions. We are already seeing his rend unold, evidenced by he January announcemeno a SIB or juvenile jusice in Massachusets.
7
 Ta deal blends privae, philanhropic, and gran dollars o pay he upron coss o he inervenions.
8
 
3 Center for American Progress | Networking for Success
Building relationships to build communities
Recognizing ha relaionship building will play a criical role in collaboraive inves-men in social impac bonds, he Cener or American Progress and he Council on Foundaions joinly organized wo discussions o bring ogeher differen ypes o poenial SIB invesors: oundaions; Communiy Developmen Financial Insiuions, or CDFIs; and invesmen firms ocused on social impac, including wealh manage-men advisors and he communiy developmen divisions o large invesmen banks.  All discussion paricipans worked a insiuions ocused on delivering boh social impac and financial reurns. Te goal o he meeings was o spark discussion abou wha incenivizes each invesor ype o consider paricipaion in a social impac bond. Te discussions cenered on wo hemes: he imporance o bridging he percepion gap beween differen invesor ypes and he role ha governmen and public policy can play in aciliaing invesmen in social impac bonds. Tis issue brie ocuses on he ormer. Te later is covered in a separae CAP issue brie, “Invesing or Success: Policy Quesions Raised by Social Invesors.
9
Te findings oulined in his brie are rom he wo meeings noed above and rom a series o one-on-one phone conversaions wih mos meeing paricipans in advance o he evens. During he phone calls, each paricipan was asked o consider his or her invesor group󲀔oundaions, CDFIs, and social impac invesmen firms󲀔and share  wha ha specific ype o invesor would wan he oher organizaions o know abou i prior o beginning a conversaion abou collaboraion. Tese phone conversaions helped prime paricipans o hink abou some o he sereoypes and misconcepions ha can impede collaboraion. Moreover, hey allowed CAP and he Council on Foundaions o  beter undersand how CDFIs, oundaions, and social impac invesmen firms operae. Te wo meeings provided paricipans wih he opporuniy o hear reacions o oher poenial social impac bond invesors and share heir own. Each meeing included abou 20 paricipans, including our o five represenaives each rom he hree ypes o invesmen organizaions and a small number o represenaives rom inermediary organizaions and governmen. Sonal Shah, ormer direcor o he Whie House Office o Social Innovaion and Civic Paricipaion, was he aciliaor a boh gaherings. Te meeings were srucured around wo case sudies, writen by independen consul-an Seven Goldberg, which oulined hypoheical SIB invesmen opporuniies.
10
 In drafing he cases, we made deliberae choices o elici conversaion on issues such as risk, ime horizon, inervenion scale, and evidence level. When discussing he ficiious cases, paricipans were encouraged o make commens ha refleced how an absrac oundaion, a CDFI, and a social impac invesmen firm󲀔raher han heir paricular organizaions󲀔migh reac i presened wih an invesmen opporuniy like hose oulined in he case sudies. Tis approach aimed o preven paricipans rom eeling pressured o speak on behal o heir organizaions.

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