According the Rockefeller Foundation’s Kippy Joseph, Social Impact Bonds (SIBs) are the “tip of the spear of innovative financing instruments that can be put to use for the benefit of society.” Foundations have been among the early pioneers in the SIB market, and they will continue to support its development.
On March 4th, the Aspen Institute in Washington, D.C. hosted a launch event for the latest Social Finance (SF) White Paper, “Foundations for Social Impact Bonds: How and Why Philanthropy is Catalyzing the Development of a New Market.” The event featured a diverse panel of active players in the pay-for-success (PFS) sphere, including: Tracy Palandjian and Jane Hughes (SF); Tamar Bauer (Nurse-Family Partnership); Surya Kolluri (Bank of America Merrill Lynch); Bill Pinakiewicz (Non-Profit Finance Fund); Eileen Neely (Living Cities); Dave Wilkinson (White House Office of Social Innovation); and moderator Kippy Joseph (The Rockefeller Foundation). This post will provide a brief overview of salient points made during the event.
According to SF CEO Tracy Palandjian, at roughly $50 million, the US SIB market has emerged as the world’s largest, and the pipeline is only growing more robust as deals are actively pursued in red, blue, and purple states. To that end, Palandjian wants to ensure that SIBs remain primarily a force for good, and she believes foundation support will be vital to this effort.
SF Director of Knowledge Management Jane Hughes presented findings from the White Paper, which was developed with the goal of aggregating early philanthropic learnings in the SIB space. While foundations have differing reasons for entering the PFS market (growing the social sector pie, driving public efficiency and accountability, underwriting innovation, etc.), their involvement has generally fallen into one of three buckets:
- Bringing together partners and fostering connections;
- Providing grants, supporting demonstration projects, and mitigating risk through credit enhancement; and
- Direct philanthropic investment in transactions.
Hughes noted that while the long-term vision for SIBs has yet to be established, foundations will have a major role in shaping the future of the sector. SIBs represent an excellent opportunity for “pursuing uncommon partnerships in pursuit of a common goal,” and foundations may work like adhesive agents to cement these connections. Below are a few takeaways from event panelists regarding how philanthropies can continue to play a crucial role in advancing the market.
Looking Beyond “First-Movers”: Nonprofit Finance Fund’s Bill Pinakiewicz noted the sector-wide shift away from outputs, such that “outcomes [will] become the gateway to all capital.” However, the social sector has, in his opinion, a “flaccid musculature” when it comes to churning out organizations that can effectively seek out both financial and social returns. In addition to continuing support for “ready to rock” or “high-octane” nonprofits, such as Nurse-Family Partnership, foundations must create and disseminate templates for success that will enhance investment readiness and “SIB-ability” for a much larger swath of organizations.
Investing Beyond the Transaction: If, as Rockefeller’s Joseph suggested, the SIB market grows to $500 million by end 2015, foundations may need to diversify their role in order to maintain a catalyzing impact. Living Cities’ Neely believes that predevelopment grants would be a significant innovation in this direction. Over time, the work that goes into building transactions should be figured into overall deal cost, akin to an environmental assessment undertaken before a building project. Recoverable grants or forgivable loans undertaken to cover these pre-transaction items will help to move the PFS market forward.
Inspiring Investor Confidence: Bank of America Merrill Lynch’s Surya Kolluri noted that in a poll of clients, over 50% sought to ensure that their investment portfolio reflected their values. This percentage had an inverse relationship with client age, meaning that number will grow over time. His experience with the New York State SIB suggests that the presence of large foundations, like Rockefeller – which have invested their reputations, research, and dollars in the PFS space – inspires investor confidence, nudging them to commit. Foundations will continue to play this important role in attracting private capital.
Funding Intermediaries: According to Living Cities’ Neely, until PFS becomes more ubiquitous, the technical assistance role played by intermediaries, such as Social Finance, will remain essential. Given the rapidly developing pace of the market and the nuanced nature of this type of expertise, the demand for intermediary assistance is on the rise. Foundations can help bridge this gap by continuing to fund intermediary technical assistance until governments are willing to adequately compensate intermediaries for this work.
According to Dave Wilkinson, a “core insight” of the White House Office of Social Innovation is that government is very good at funding innovation in some fields (defense, pharmaceuticals, energy, etc.), but not the social sector. By “de-risking” government innovation, SIBs will assist in fully unlocking the sector’s potential. Yet, as the panel’s insights made plain, for SIBs to fulfill their great promise, foundations must continue to play their essential, versatile role.
Entry by Daniel Rubin, Associate