July 14, 2014 | Read Time: 2 minutes
As social-impact bonds gain steam, their development isn’t going exactly the way nonprofit experts expected.
Sometimes called pay-for-success contracts, the efforts seek private investors to pay the cost of providing a social service. If an independent evaluator certifies at the end of the program that it met performance goals, the government pays back the investors, who may also receive a profit depending on the results.
Proponents thought foundations would lead the early charge on social-impact bonds, but instead it’s been commercial banks, like Bank of America Merrill Lynch and Goldman Sachs, and wealthy investors, says John Roman, a senior fellow at the Urban Institute.
“They don’t see this as being nearly as risky as we all thought they would,” he says.
J.B. Pritzker, a Chicago businessman, invested $2.4-million in a social-impact bond in Utah to expand availability of quality preschool to low-income children as a way to reduce the number of kids who need remedial and special education.
Mr. Pritzker, whose giving focuses on early-childhood education, says he made the decision to invest personally, rather than through his family foundation, because he wanted to help prove social-impact bonds’ viability as a for-profit investment.
“We’re pioneering a new financial instrument that will change the face of early-childhood education,” he says. “And we need it to work for investors, not for philanthropists.”
Mr. Pritzker compares investing in social-impact bonds today to the early days of municipal bonds, before research firms like Moody’s and Standard & Poor’s started to analyze and rate them. He believes similar services will be needed to make social-impact bonds attractive to mainstream investors.
“We have to build the infrastructure so that Fidelity one day and Goldman Sachs—not in its social-impact group but in its regular investment group—can recommend this to investors,” he says. “Then you’ll see a large amount of capital going into social-impact bonds.”
