Bank of America Merrill Lynch scopes out US social impact bond market

Bank of America Merrill Lynch and impact investment firm Social Finance Inc. have identified a series of potential investment opportunities in social impact bonds for military veterans in the US, in the latest sign of burgeoning interest in the sector.

The structures could address employment and wellness, chronic health, and veterans’ homelessness, according to a joint report.

The 37-page report, Improving outcomes for veterans, includes input from the US Department of Veteran Affairs and the US Department of Defense, and assesses the viability of using social impact bonds (SIBs), known as pay-for-success (PFS) in US.

It concludes that there are three “strong opportunities” where PFS could play a role: helping unemployed veterans aged between 18-40 with mental health problems; home-based care for the over 65s with a chronic disease; and housing support for homeless female veterans.

The report reflects a growing interest in PFS from the bank’s clients and is endorsed by its head of corporate responsibility, Andrew Plepler, and its head of global wealth & retirement solutions, Andy Sieg.

In 2013, Bank of America Merrill Lynch raised $13.5m from its high-net-worth and institutional clients to fund a PFS programme in New York helping former prisoners find employment.

The five-and-a-half year programme, developed with Social Finance, includes a $1.32m guarantee from the Rockefeller Foundation that will cover 10% of investors’ principal. The US Department of Labor and New York State are the outcome payers.Through PFS or SIBs, investors provide funding to non-profits for programmes where an outcome payer, usually a government agency, has defined set targets. If targets are achieved government repays investors their principal plus a return. If outcomes are not achieved, government is not obligated to repay investors.

In the US, there is a developing bipartisan trend in Congress and federal agencies for evidence-based social service programmes, such as PFS. Republican congressman Paul Ryan and Democrat Senator Patty Murray have introduced a bill for an evidence-based policymaking commission that emphasizes the need to gather data to evaluate federal programmes.

And bipartisan legislation has been introduced in the House and the Senate for a $300m federal social impact bond fund to develop PFS and SIB projects across the US. Further, the White House and Office of Management and Budget have directed federal agencies to base their work on scientific validation.

The sector received a boost last year when the Securities and Exchange Commission advised Social Finance that it could offer and sell SIBs without having to register as a broker-dealer, as required under US federal law. Lawyers representing Social Finance had written to the SEC requesting “no-action relief” on this activity; the SEC replied the next day agreeing to the request. Bank of America Merrill Lynch has previously worked on several reports on social impact bonds focused on the UK with impact investor Bridges Ventures, which runs a pooled social impact bond fund.