Doubling down on rehabilitating former convicts

Latest socially responsible investing plan gives investors opportunity to help; returns based on program's success
DEC 08, 2013
Bank of America Merrill Lynch is hoping that a new product offering will give wealthy investors the chance to see a monetary return on their philanthropy by investing in a program to rehabilitate ex-convicts. The firm launched its first so-called social-impact bond with $13.5 million in funding from large retail and institutional investors, including Bill Ackman's Pershing Square Foundation, the Laura and John Arnold Foundation and former Treasury Secretary Lawrence Summers. The funds, which were collected over a period of six weeks, will go to help former prison inmates find jobs. The investment works as a contract between New York State and a private charity, the Center for Employment Opportunities. As part of the agreement, the government sets objectives for the charity to fulfill, and a third party, Social Finance Inc., which partnered with Merrill Lynch to find wealthy investors, will raise the funds. The state then pays investors based on the program's performance and ability to reduce recidivism. For investors to get their capital back, the project must meet a baseline goal of an 8% decline in recidivism or increase employment of former convicts in New York by at least 5 percentage points over the next five and a half years. The bond could pay investors up to 12.5% depending on how much more successful the program is beyond those minimums. Executives at Bank of America Merrill Lynch estimated that returns would likely be in the high single digits. Returns are taxed as ordinary investment income. “Even at the greatest level of success, the state's savings will exceed the amount the state pays to investors,” New York Gov. Andrew Cuomo's office said in a statement. Although Social Finance has helped launch similar funds in Europe, this is the first of its kind in the United States. The firm has seen a lot of interest in funds that screen stocks based on social or environmental factors, and this will provide another, more direct option for investors who want to affect social change with their investment dollars, said Andy Sieg, the head of global wealth and retirement solutions at Bank of America Merrill Lynch. “What has never been available until now is a way to directly link their investment dollars and investment returns with impact that they are having on underlying social problems,” he said during a conference call. The offering was only open to ultra-wealthy investors with over $10 million in investible assets and had a minimum investment of $100,000. Over a period of about two months, the partnership drew about 40 retail and institutional investors who contributed an average of $300,000 apiece. There will be another call for investment in the project in two years. In addition, the Rockefeller Foundation, a philanthropic organization founded by John D. Rockefeller, provided a $1.32 million guarantee to the project so that investors are ensured a return of 10% of their principal should the project fail to meet the state's minimums.

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