When reading about SIB's this week, I kept wondering what the value proposition was for private sector investors. I understand that finance and investments are increasingly directed by value and social impact and not strictly financial return, but what happens when a non-profit or social enterprise does not deliver on its promises of social impact? Where then is the investor left?
From having attended a workshop at the Social Enterprise Conference last year, I know that the Acumen Fund for example goes after investors who have high-risk, long-horizon investment thresholds. An August 2012 SIB deal in New York City outlines the various stakeholders in such a deal:
- Goldman Sachs: $9.6 million investment
- Michael Bloomberg Foundation: 75% credit guarantee (limiting Goldman's downside to $2.4 million)
- Government (Bloomberg Administration): formal capping of payout (Goldman's upside is $2.1 million max)
IRR (internal rate of return) = 5% on a four-year deal
In trying to untangle this financial mess, it is first very clear to me that SIB's are more about multistake-holder relationships than actual bonds or financial instruments. In fact, the logistical difficulty in bringing together the private, non-profit, and public sectors points to a future economy where "facilitators" (or intermediaries, as McKinsey calls them) will negotiate deals, seek out partners, and draw up contracts.
Looking into the incentives for Goldman Sachs to front $9.6 million, a few thoughts come to mind:
1. The IRR is very poor (a healthy return in the private sector is around 20% or higher). So there is no way GS is thinking of this investment as similar to any other private investment. They must have special guys on this case (more job opportunities for people like me!)
2. Did GS make the financial commitment before knowing that the Bloomberg Foundation would alleviate any potential downside with a credit guarantee?
3. Is it legitimate or fair to cap the payout to GS? After all, they are the ones that have made the investment. If they are willing to take the risk, they should see the return.
4. How "proven" does a program or social pathway have to be before a SIB is declared open for business? Is it only older, more established organizations that have access to this type of financing?
My question for you this week is: How different is risk int he private sector from risk in the public sector? How do we go about thinking of these two situations differently?
Sources: http://www.ssireview.org/blog/entry/private_investment_in_social_impact_bonds
Can Social Value Ever Truly Be Measured
ReplyDeleteWhen reading this article I found it interesting that empirical methods were ever even applied to measuring social value when it’s difficult to even accurately encapsulate it from a qualitative standpoint. It is impossible for quantitative metrics to capture or measure qualitative factors or benefits of social services because they are so unique to each individual and it is in no way shape or form based on a cookie cutter approach. You simply cannot measure things like experiences, opinions, values, etc. Furthermore, very little research has been done on the impact of many social benefits into the long-term future. Future benefits and comparative analysis as to the outcomes future outcomes of people who benefit from social services should be paid a great deal of attention to. It is evidence from things like this, that we can begin to use to start the conversation on “Measuring social value”
Social value has for the most part a key subjective component which is formed on the basis of different people, from different backgrounds, having different values, weighing in on the same issue. Thus, the fact that people have varying perspectives, they will place different values on issues through whatever lenses is unique to them. What makes this matter even more complicated is the fact that politics and what is politically wrong or right makes it harder to validate the weigh in which people weigh the importance of different issues. To buttress my point the article gave the example that some value building prisons as a form of altruism even above investment in preventative measures such as education. When defining social value, you cannot elude the ever present issue of ascertaining one’s motives or reasons behind why they may or may not place value on something.
In regards to creating social good for public welfare, this must be in all-inclusive discussion from people from all parts of the economic spectrum. Decision makers must not rely on their judgment alone to create metrics and value for the programs and services they create, but make sure they are adequately informed from the very people they will be creating the social services for. If this does not happen, one then falls into the trap of measuring a person’s worth(in terms of the contributions they can make to society and or societal impact) based on wealth, status, level of education, etc.