Goldman Sachs Invests in First U.S. Social Impact Bond

Goldman Sachs’ investment in a new public-private financing structure in New York could be the beginning of a social impact bond industry.


Goldman Sachs has signed on as the investor in the U.S.’s first social impact bond, a new public-private financing structure that asks investors to bear at least partial risk for the outcomes of government-funded social programs. While Goldman’s risk has been somewhat attenuated by Bloomberg Philanthropies, the investment suggests that a proper social impact bond market might not be too far away.

“I think most people thought this was going to attract philanthropic money in the very beginning, for proof-of-concept pilots,” says Kristin Giantris, who tries to promote social impact bonds through the Nonprofit Finance Fund (NFF), a New York–based organization that supports nonprofits via loans, consulting and other services. “Now we’re looking at proof-of-concept with a commercial investor, and I think that’s significant. I think this deal could leapfrog the market forward in terms of who the potential investors are in these transactions.”

Because the social impact bond is a brand-new concept to the U.S., it would follow that the industry undergirding it is a nascent one, too, and will need many years to concretize. But Giantris says not so, pointing out that an already-developed infrastructure — that which supports U.S. banks’ community reinvestment practices — could be easily adapted for a social impact bond market. If that is the case, a well-oiled social impact bond-making industry may not be as far-off in the U.S. as many predict.

The nation’s banks have long been beholden to the Community Reinvestment Act (CRA), a law passed by Congress in 1977 to encourage financial firms to provide credit assistance to their local communities.

“We have an infrastructure for this in the U.S. that’s really available to be tapped into, unlike other places in the world,” Giantris says. “What we’re saying with the NYC transaction is, ‘Here’s a new product.’ It’s in the community investment space, and it taps into a pool of capital and expertise that already exists in banks. For them, a social impact bond is a step along a continuum.”

The law also offers an incentive to these institutions to look more closely at social impact bonds. Goldman’s Alicia Glen, who heads Goldman Sachs’ Urban Investment Group — the division that made the investment — allows that “I believe we’ll get CRA credit” for the investment, but hastens to add that it’s a $10 million transaction in a CRA portfolio of over $2 billion, and that “we’re not doing this to get an A+ on our CRA exam.” Her group’s involvement, she says, was motivated by a desire to be in on the ground floor “of what we hope will ultimately become a much more broadly available financial instrument.” She adds that the investment aligns with the mission of the Urban Investment Group, which is to seek attractive investment opportunities that also entail social and economic benefits for underserved urban areas.


The details of the nation’s first social impact bond were revealed in early August, when New York City Mayor Michael Bloomberg announced that Goldman would invest $9.6 million to cover the costs of a program designed to reduce youth recidivism by providing education, training and counseling to 16- to 18-year-olds incarcerated on Rikers Island. Goldman’s investment, structured as a loan to the nonprofit overseeing the intervention, will cover the program’s cost for four years (and makes the “bond” descriptor something of a misnomer). If, after that time, the program is deemed a success — a threshold achieved if recidivism falls by 10 percent or more — the city’s Department of Corrections will repay Goldman’s loan in full. Depending on how sharply the rate of reoffending falls, the $923 billion financial firm stands to earn a return of up to $2.1 million from the deal (provided recidivism drops by 20 percent or more).

But in the eyes of government reformers, one of the most compelling aspects of the social impact bond is what happens if the program doesn’t reach its goal: the city government owes nothing.

New York City has been looking into social impact bonds for over a year, says Kristin Misner, chief of staff to Deputy Mayor Linda Gibbs. The inspiration came from the U.K., where a pool of £5 million ($8.21 million) collected from individuals and charities has been invested in the world’s first social impact bond pilot, which is funding a recidivism-prevention program at a prison in a suburb of London. After Deputy Mayor Gibbs saw a presentation on the innovative financing concept, Misner was tasked with combing through the city’s portfolio of social programs and asking herself where the SIB model might best apply.

“You want to find the programs where there’s a high upfront cost of delivering an intervention, and figure out where bringing private funding to the table can help advance an issue that the government wouldn’t already be funding,” she explains.

The youth recidivism program stood out as a good fit. Adolescents who enter Rikers have a 48 percent chance of returning the following year. If the program is successful in lowering that percentage, the city will see cost savings almost immediately, rather than having to wait years or decades for the benefits of the intervention to accrue. What’s more, a night spent in jail costs the city a set amount — which means a night avoided does, too. This helps the city and its contract partners avoid subjectivity in determining the costs, thresholds and returns named in the deal.

“For each youth that we can prevent from coming back and being readmitted, there’s a marginal cost savings,” Misner says. “Those savings get particularly large when you prevent enough youth from coming back that you can close a housing unit, close a wing of the jail, and maybe, ideally, you can close the jail.”

Goldman’s Glen says the social impact bond’s unusual mix of edge-pushing novelty and objective, clear-cut terms attracted her group to sign on. “We were able to get very comfortable with the risk, the return we hope to achieve and the partnership,” she says.

But what it took to get comfortable with the terms and the expected outcome was plenty of first-person research into the program, she adds.

“This was not a passive type of underwriting or analysis,” she says. “We went out to Rikers, we met with the warden, we understood in a physical way what was going to happen. I don’t know how often there were a bunch of Goldman bankers talking to a warden on Rikers, but we were out there.”

Even given that level of involvement, Goldman’s ready to do it all again. New York City released a request for expressions of interest on August 2, seeking proposals for more SIB setups from interested nonprofits. Goldman would like to continue to be involved, and at least in the early days, says Glen, each deal will necessitate as much scrutiny as the first.

“Each one is quite bespoke. This is not a commodity product, and it won’t be for a long time,” she says. “That would be quite a victory.”

Undoubtedly making the deal more attractive to Goldman is a dimension that distinguishes the New York City social impact bond from its U.K. inspiration: Bloomberg Philanthropies, Mayor Bloomberg’s personal foundation, has offered a $7.2 million loan guarantee that reduces Goldman’s potential downside to only $2.4 million. Glen says that the guarantee was already on the table when Goldman entered the SIB conversation in NYC and adds that she can’t speculate on whether the bank would have gotten involved without that assurance, though she does say, “It helped us get more comfortable with the risk.”

In Massachusetts, a state that in a matter of weeks will announce the details of its own SIB contracts to address juvenile justice and chronic homelessness, Secretary of Administration and Finances Jay Gonzalez confirms that no such loan guarantee will be part of the deal. This will likely affect the type of investors who ultimately signal their interest.

“We don’t plan to provide any kind of guarantee, so at the end of the day, the investor is going to need to be willing, in our transaction, to take on substantial, if not all, of the risk,” Gonzalez says. “I think the philanthropic investors, generally speaking, are probably more likely, from a mission-driven perspective, to be interested in these types of transactions and to make investments at reasonable rates of return, as opposed to commercial rates of return.”

Giantris’s NFF says that for the counties, cities and states who announce the next round of SIB deals — which is likely to include New York State, Los Angeles County, and a handful of others across the country — the New York City deal is likely to serve as an important model.

“I think what NYC has piloted for the market is that you can incent a commercial investor into these kinds of transactions, but given that it is the first time a deal like this has been done in the country, there will be some level of risk mitigation that’s needed,” she says. “In this case, the risk mitigation came in the form of the partial guarantee. I do think that it’s a great precedent.”