Analysis: Wall Street sees social-impact bonds as way to do good and do well

Tue Nov 12, 2013 1:17pm EST
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By Jessica Toonkel

NEW YORK (Reuters) - Wall Street banks are eyeing a nascent market that improves their public image at a low risk and still offers them a reasonable return on capital.

The market is in so-called social-impact bonds, also known as pay-for-performance contracts, through which private capital can be funneled into philanthropic projects usually funded by governments and charities. The investors will receive a return based on whether a project saves public money by addressing the social ill it targets.

Goldman Sachs (GS.N: Quote) has launched two such bonds in the past 16 months - one for $9.6 million aimed at reducing recidivism among teenagers at New York's notorious Rikers Island jail, and the other for almost $5 million, intended to help children from low-income families in Utah prepare for kindergarten. This month, Goldman also said it is raising a fund to allow its clients to make investments that have "measurable social impact," including social-impact bonds.

Now Bank of America Corp (BAC.N: Quote) is set to launch a social-impact-bond investing program, three sources familiar with the situation said. Details of the program are not known.

Other banks, such as JPMorgan Chase & Co (JPM.N: Quote), Deutsche Bank (DBKGn.DE: Quote) and Morgan Stanley (MS.N: Quote), are keeping a close eye on these projects before getting involved, bank executives said. In some cases banks see the bonds, which were first launched in Peterborough, UK, as a product to sell to their wealth management clients, said George Overholser, chief executive officer of Third Sector Capital Partners, a nonprofit investment bank helping to structure various pay-for-performance deals.

A Bank of America spokeswoman declined comment.

The growing interest of banks in these bonds bodes well for cash-strapped governments and charitable foundations that want more private-sector cash to fund projects that serve a social need. Nonprofits and governments are hoping to develop a wider market for such securities, betting that the bonds would become a way to finance social programs that struggle as government budgets tighten.

"We do these deals to get strong financial-risk-adjusted returns that have a strong impact," said Alicia Glen, head of Goldman's Urban Investment Group, which oversaw the creation of the two social-impact bonds. The group has been structuring and financing community revitalization projects for the past 12 years.   Continued...

A Wall Street sign is pictured outside the New York Stock Exchange in New York, October 28, 2013. REUTERS/Carlo Allegri