As Ben Franklin noted, an ounce of prevention is worth a pound of cure — and that’s true not only for health care but also for a host of social problems, including crime, homelessness and teen pregnancy. But governments aren’t particularly good at funding preventive services. Spending tax dollars on programs whose outcomes are not immediately obvious — or guaranteed — is a hard sell for politicians, even though these investments may eventually save big bucks years down the road by, say, cutting crime and prison populations. The market may overcome the prevention predicament with the social-impact bond , a new investment product created by Social Finance, a London private-equity firm that backs social entrepreneurs. Funded by private investors , SIBs — which are also gaining traction among U.S. investors and policymakers — aim to finance long-term preventive programs run by nonprofit groups to tackle tough social issues that cost taxpayers money. But investors can also gain a financial return. How? Governments pay for a program’s success. If an SIB-funded program mitigates a problem by meeting measurable targets, that saves the government money, and a portion of the savings is used to repay the bondholders with interest. But the bonds are not government backed: if the social project fails to meet its targets, investors are out of pocket, and the government doesn’t pay a penny. Social Finance’s first and, so far, only SIB was launched in September: 17 investors, including the Rockefeller Foundation, bought bonds totaling about $8 million to finance an eight-year project led by the nonprofit St. Giles Trust to reduce recidivism among low-level criminals, who in the U.K. have a reconviction rate of 60%. Each recidivist costs the government more than $200,000 a year in judicial and incarceration costs. St. Giles’ program, Through the Gates, uses peer advisers — most of whom are ex-cons — to mentor newly released prisoners and counsel them on issues ranging from housing to employment and training to drug and alcohol abuse. The program will target 3,000 male ex-offenders released from Peterborough Prison in Cambridgeshire. If it cuts the reconviction rate by 7.5% or more compared with a control group, investors will recoup their money plus a graduated return that is capped at 13% a year. SIBs are the most innovative instrument in a growth area of finance known as social investing or impact investing, which offers to help investors do well by doing good. “Investing simultaneously for financial returns and social returns is not mutually exclusive,” explains David Hutchison, Social Finance’s CEO. A recent report from investment bank JPMorgan argues that “impact investments are emerging as an alternative asset class” that channels “large-scale private capital for social benefit.” In Britain, an estimated $300 million has already been poured into social investments, and Hutchison expects that figure to grow quickly. That growth could be abetted by the plan of Britain’s coalition government to set up a “Big Society bank” for impact investing that’s initially funded with $495 million — $330 million from the country’s four biggest commercial banks and $165 million more from unclaimed assets in orphaned accounts. Moreover, if U.K. charitable trusts, which are sitting on assets totaling $115 billion, put just 5% of that capital into impact investing, it would enlarge the market by an additional $5.7 billion. JPMorgan calculates that the global social-investment market could swell over the next decade to anywhere from $400 billion to $1 trillion, generating profits of $183 billion to $667 billion.
