(Corrects to identify Laura and John Arnold Foundation as
investor, not John Arnold personally.)
NEW YORK Dec 30 Merrill Lynch and U.S. Trust
reached out to some high-powered clients this quarter to invest
in a social-impact bond whose proceeds finance a program to
lower recidivism rates among ex-convicts in New York.
The project raised $13.5 million over 60 days from clients
of the Bank of America Corp-owned brokerage and wealth
management firms. Investors included former U.S. Treasury
Secretary Lawrence Sommers, Utah philanthropist James Sorenson,
hedge fund founder Bill Ackman's Pershing Square Foundation, and
the Laura and John Arnold foundation.
"They are looking for new and creative ways ... to have a
more direct connection between the dollars they are investing
and the impact it is having on a social problem that they care
about," Andy Sieg, head of global wealth and retirement
solutions at Merrill Lynch said during a telephone news
conference on Monday.
Investors can realize annual returns of up to 12.5 percent
over five-and-a-half years, although the probable return is in
the high single digits, he said. Actual returns depend on the
success of job-training programs for 2,000 newly released
prisoners administered by the Center for Employment
Opportunities. Success rates will be determined by Chesapeake
The social impact bond is the first pay-for-success
instrument in which Bank of America participated, and the first
in which a state, New York, is participating. Reducing
recidivism will help control prison costs, the fastest growing
budget item in New York in 2012 after Medicaid, Gov. Andrew
Cuomo said in a news release.
About 20 pay-for-success bonds have been issued in programs
worldwide, but more than 10 U.S. states are considering the
programs, said Tracy Palandjian, chief executive of Social
Finance Inc, a nonprofit that structures such investments.
The new issue attracted an average order of $350,000 from 40
high-net-worth individuals and from family and other
foundations. Capital from investors will come in two stages,
this June and again in early 2016.
The funds raised are minuscule compared with the about $12
trillion in U.S. individual investor assets under management and
the billions raised weekly in capital markets, Palandjian and
But the Merrill executive said he is confident more
transactions will follow at Bank of America and other
institutions because of, "strong interest by clients in impact
The Rockefeller Foundation provided a $1.32 million guaranty
that covers 10 percent of investors' principal should it fail to
repay 100 percent of their investment. The Robin Hood
Foundation, a nonprofit with strong support from Wall Street and
private equity, invested $300,000 in the project.
(Reporting by Jed Horowitz. Editing by Andre Grenon)