Katie Gilbert on Minnesota’s human capital performance bonds

A great article by Katie Gilbert about Steve Rothchild’s human capital performance bonds came out yesterday in the Institutional Investor.  Some interesting quotes:

On states looking into SIBs:

The state of Massachusetts formally sought out information about pay-for-success contracting over the summer, and this winter will issue a request for proposals from pubic social programs interested in the model. In New York City, a pay-for-success system will soon be applied to a program that works with the adolescent portion of the adult justice system and seeks to lower the chance that they’ll recidivate. New York State is also exploring the concept, and hopes to present a concrete pilot to test pay-for-success in six months to a year. Similar signs of interest are springing up in Virginia, Michigan, Indiana, and parts of California.

On potential sources of funding for SIBs:
Palandjian confirms that she’s had early conversations about the potential of pay-for-success investments with a handful of pension funds, and is generating the most interest from schemes with Economically Targeted Investment programs, which encourage a focus on investments in the pension fund’s geographic region that offer strong risk-adjusted returns in addition to some economic payoff in the pension fund’s geographic region — a snug fit for pay-for-success products, says Palandjian. It’s still too early for any of these funds to comment publicly on their possible interest in these investments.

On a SIB as an asset uncorrelated with the market: 

“I think one interesting characteristic is that this really does offer the promise of being a very noncorrelated asset for an institutional investor,” says Bugg-Levine. He points out that such an investment would carry two main types of risk: execution risk (the possibility that the nonprofits will not achieve their desired outcome) and political risk (the chance that the government side of the contract will not make good on its promise to pay investors out of the savings it incurs). Typical market risk doesn’t directly impact the investment at all.

Of course this investment is susceptible to macroeconomic risks (i.e., systemic risk) in the same way that the rest of the market is. If economic downturn drives up unemployment, as it has over the past 2-3 years, then a downturn in consumer demand will depress the market, while an increase in unemployment will not only increase criminal activity (the two are typically correlated) but also make it harder for people to get jobs and thereby increase the cost of obtaining the social outcomes (e.g., increased employment, decreased recidivism, housing the homeless) that social impact bonds seek to deliver.  So macroeconomic risk affects social impact bonds at least through the execution risk that Bugg-Levine mentions in the above quote.
The article mentions the $100 million dollars that Obama’s 2012 budget designated toward pay-for-success approaches.  I have seen this mentioned again and again, and nobody seems to realize that the money is simply an effort to raise awareness about the pay-for-success model and signal federal government interest. The money itself is not nearly enough to do any serious program, especially when divided across 5 agencies (Education, Labor, Justice, the Social Security Administration, and the Corporation for National and Community Services).

 Katie Gilbert, the article’s author, has been following and writing about social enterprise and impact investment for some time, apparently.  I haven’t had the chance to read these articles, but some of the ones that caught my eye are:

The Appeal of the Social Impact Bond
June 13, 2011
The Institutional Investor

http://www.institutionalinvestor.com/Article/2847158/Search/The-Appeal-of-the-Social-Impact-Bond.html?Keywords=Katie+Gilbert&OB=D&DatePeriod=0

Impact Investors Move Closer to Getting Their Own Exchanges
January 05, 2012
The Institutional Investor 

And today’s article:


The Latest in Socially Conscious Investing: Human Capital Performance Bonds 
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