The largest ever social impact bond has been launched, thanks to investments from Goldman Sachs and several foundations.
The $27 million philanthropic fund will work to prevent young men in Massachusetts from going back to jail or prison. If more people stay out of jail or prison, government funding pays back the donors with a modest profit.
Goldman Sachs pledged $9 million towards the social impact bond, and the Kresge Foundation invested a further $1.5 million.
Another $6 million was invested by the Laura and John Arnold Foundation ($3.7 million), backed by hedge fund billionaire John Arnold, New Profit ($2 million) and the Boston Foundation ($300,000).
Living Cities, a collaborative of 22 of the world’s largest foundations and financial institutions, pledged a further $1.5 million.
The Massachusetts Juvenile Justice Pay for Success Initiative was announced by the state's governor, Deval Patrick, as a "smart financial solution" to a difficult problem, according to a report by CNBC.
Non-profit group Roca will work with 929 young men between the ages of 17 and 23 in the state over seven years by providing personal outreach, life skills, and employment training to help reduce recidivism.
If the bond achieves its target of a 40% reduction in re-incarceration, Goldman as the senior lender for the bond and will be paid back the $9 million plus 5% annual interest. Junior lenders Kresge and Living Cities will be paid their base plus 2%.
If the bond exceeds its target, the funders can receive a small return on their funding for assuming the upfront financial risk, including up to $1 million for Goldman Sachs, according to a document issued by Massachusetts state.
The Massachusetts programme is Goldman's third social impact bond investment. The first was when the bank committed $9.6 million in a partnership with Michael Bloomberg to a New York City jail program in August 2012.
The second came last summer, when Goldman partnered with the United Way of Salt Lake and JB Pritzker to commit up to $7 million to finance preschool in Utah.
"Social impact bonds offer an innovative way for public, private, philanthropic, and non-profit actors to come together and align their skills and resources in pursuit of measurable, positive social change," said Kristina Costa, an expert on the topic at think tank the Center for American Progress.
"Like all tools, social impact bonds have limitations—but I think they have real potential to help move the needle on some of our country's toughest social problems, from recidivism to chronic health conditions."