Goldman Sachs buys ‘social impact’ bonds

If Chelsea nonprofit succeeds, bank profits

Goldman Sachs, the New-York based investment firm known for managing the money of sovereign nations and millionaires, is betting on Roca, a Chelsea nonprofit that tries to keep young men out of jail.

Goldman Sachs and five local and national foundations are investing $18 million as part of an experiment in financing social services known as “social impact” bonds or “pay for success.” If Roca meets its goals in reducing recidivism — that is the rate in which released offenders return to jail — the state will pay back these investors, plus a modest return.

If the nonprofit fails, the investors will lose nearly all their money.

“This is a change in the way government does business for the better,” said Glen Shor, state secretary of Administration and Finance. “This project can be viewed as a laboratory. We are testing and evaluating the types of interventions to prove their worth, quantify their impact, and determine whether . . . this would make a meaningful impact on other young people.”

Pioneered in the United Kingdom, social impact bonds are viewed by officials as a way to finance social services during a period of tight budgets and get results. Like stocks, bonds, and other ventures, they offer a return in exchange for the risks taken by investors. The return comes from the savings governments realize from, say, avoiding the costs of keeping someone in prison.

Other states are experimenting with social impact bonds, but Massachusetts officials say the seven-year deal with Roca, which will try to help 1,000 young men, is the largest pay-for-success effort yet launched in the country. Governor Deval Patrick will announce the project Wednesday.

Goldman Sachs, the Laura and John Arnold Foundation, New Profit, the Boston Foundation, the Kresge Foundation, and Living Cities will fund the program through loans and grants. The investor money is not entirely at risk: their principal could be lost, but some will earn interest no matter the program’s success.Goldman Sachs, for example, will earn an annual 5 percent on its $9 million contribution regardless of the outcome; Michigan-based Kresge Foundation and Living Cities, which is headquartered in New York City, will earn 2 percent interest on their loans of $1.5 million each.

Goldman Sachs has been investing its own capital in projects that have a social impact for more than a decade. But last year it launched a social impact fund, which is expected to reach $250 million by the time it closes in the fall, geared specifically to fund programs for bring affordable housing, health and educational services, and economic growth to disadvantaged neighborhoods.

“This is an opportunity to really leverage private capital,” said Andrea Phillips, Goldman’s vice president of the urban investment group. Increasingly, clients want to do good with the money they are investing, and the Roca project offers an opportunity “have an impact on the young men of Boston,” she said.

Roca has been working with troubled teens in the Boston and Springfield areas for 25 years. This money will allow the organization to expand its services to reach many more young men, who are more likely than women to be incarcerated, said Molly Baldwin, the founder and chief executive of the nonprofit.

The nonprofit will work with a third-party evaluator, which will measure Roca’s interventions against a control group of troubled teens not receiving the services to determine whether the program has an impact. If Roca is successful, it could make it easier for the organization to get sustained funding, she said.

“This is an extraordinary opportunity on a lot of levels,” Baldwin said.

Roca provides a four-year program for its participants, initially giving them counseling and classes to help them change their behavior and avoid violence. The organization also teaches reading and math and offers vocational training to help them get a job in trades such as culinary arts and painting.

Roca’s approach worked with Ralph Bonano, 20, from Chelsea, who was assigned to the program after being placed on probation for unarmed robbery. Bonano said he initially avoided Roca, but the counselors hounded him, coming to his hangouts and trying to talk to him. After more than a year, Bonano said he relented and attended the sessions and the job training program.

Bonano said he now has a job on an assembly line at a plant that makes military equipment and is working to earn the equivalent of a high school diploma.

“It’s helped me stay out of jail,” Bonano said. “Not only does it give other kids an opportunity to change and to be treated as a normal person, not just a criminal.”

The state is also exploring using a similar financing model to address homelessness and basic adult education.

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Correction: An earlier version of this story misstated the source of the capital used to invest in social impact projects. Goldman Sachs had been investing its own capital in such projects.