Episode 32 - What is an Impact Bond? with Mike Silvestri
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“We have a financial and Biblical responsibility to steward the money that has been entrusted to us.”
Mike Silvestri taught us a lot about social impact bonds on this episode, and if you haven’t heard of these—or maybe you’re already familiar—it’s something you simply have to hear about it. The way he describes them, it’s a chance for everyone to win.
At the very least, Mike got our wheels spinning and helped us to think about a conversation that we may not have previously been involved in. We hope you can join us in this conversation moving forward.
Episode Transcript
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Henry Kaestner: Welcome back to The Faith Driven investor podcast. We've got a special guest with us, Mike Silvestri. Mike, is here to talk to us all about some new and innovative financial vehicles along the concept of paying for success. Career impact bonds. Social impact bonds. We've spent time on this program talking about some of the traditional asset classes, public equities, private equities, real estate. But God is an entrepreneurial, creative God and has asked us to be fruitful and multiply. And so Mike is going to push the envelope and how we think about investments and how we think we might deploy his capital as we make investments that we think might make an impact in culture. So we going talk a lot about that. We can tell you about Mike's background. But before we get there, Mike, I want to ask you, where are you recording this?
Mike Silvestri: Thanks, Henry. I am recording this podcast from a dorm at Harvard College.
Henry Kaestner: Because you haven't graduated yet? Your résumé would lead me to believe that you have.
Mike Silvestri: They do say college is the best times, but no my wife and I actually live with our two young girls at Harvard. We're a resident tutors. So we're advisors for students. Of course, when they are on campus and just help kind of mentor them and be by their side as they go through their undergrad journey.
Henry Kaestner: When I was in college, we made a T-shirt that said The University of Delaware. I went to Delaware University, the best five or six years of my life. And in your case, just doing the math, harvard. The best 15 or 16 years of your life.
Mike Silvestri: I just can't get enough of it. Right.
Henry Kaestner: That's awesome. It's also just making my brain swell a little bit because I remember my time in the dorms and thinking what it would have been like for a family to be down the hall. I definitely would have been better behaved. And maybe that's why you've done that. I'm sure that you also have an incredible opportunity to speak in the lives of a bunch of young future leaders. So I I think actually that that's super, super cool. Mike, tell us. We consider you an expert in some fields of financial innovation. How did you get here? What's your backstory? What's your background?
Mike Silvestri: Yeah, I mean, I think the story honestly starts decades ago. I mean, I think my faith, my view of my vocation, my world view honestly started in hidden corners of the world. I spent a number of summers growing up traveling with my family and with my church just to remote areas on medical missions, strips serving the poor, those that lacked access to health care. And at a young age, honestly, it was sort of confronted with the reality that the world is much bigger than my small world that I grew up in and that the deck is stacked against so many. And so I think for many years that's sort of been wondering how can I do something about that? I would say my faith, my values, the gospel inform a lot of that, my desire to bring out justice and help make the world a better place for God's glory. But I've been in particular trying to think through how can I do that in my career and ask myself, you know, where do my skills and the passions that God has put on my heart align with the needs that I see in this world? So that led me initially into consulting. I was a strategy consultant for well over half a decade, starting in private sector consulting, shifted for several years into social impact consulting before heading back to Harvard or a graduate school program at Harvard Business School and Harvard Kennedy School, where I became really interested in impact investing. Read a lot about it was very intrigued by different investing models. And a few of those models were those that are being pioneered by social finance, which is the firm that I now work at. So I've been there for several months now and helping spearhead our work around bringing paper success to the broader impact investing field.
Henry Kaestner: So bring us back to the time right before you went back to Harvard, where you started getting some exposure to impact investing. Tell us about some of those stories. What were some of those experiences? How did they fit in with some of those earlier ministry experiences you had overseas?
Mike Silvestri: Yeah, it's a great question. So my initial exposure to impact investing was through a lot of the coursework that I was taking. And I've been reading a lot of models on negative screening. Right. Let's come up with a package of investments that sort of. Take out the bad companies, whether that's, you know, cigarettes, firearms, etc., and I felt like that was good, but I felt like the bar could potentially be higher, at least in terms of how do we truly steward our capital to make the greatest impact possible. And so I came across social finance and the Pay for success model, which ties financial returns directly to social outcomes being achieved. And I was intrigued by it and kept in touch with the firm and eventually found myself in a role there. But I felt that it directly addressed a lot of the longings that were put on my heart a long time ago. I mean, seeing needs in health care and workforce development and just, you know, family stability, these are issues that our society has been trying to address for generations. And we spend a lot of money. Our government spends a lot of money trying to solve these problems. But what if we could leverage the private capital markets through papers, excess investment structures to actually take proven interventions to scale and actually start to move the needle in measurable ways on these problem? So that's what excited me and brought me to this firm could.
Henry Kaestner: Give us an overview of one to one, if you will, of the pay for success model career impact minus social impact upon what is it? What's the concept? And then maybe just give just a couple of very quick examples.
Mike Silvestri: So pay for success in general is a set of financing strategies that ties financial returns directly to outcomes being achieved. So regardless of the investment structure to these different deals, share a set of core principles, right. You have to have clear identification of outcomes. You have data driven decision making of strong accountability for those outcomes being achieved. In many cases, you cross-sector partnerships because that's what it takes to scale up these proven interventions and you're leveraging private capital for impact. So in a social impact bonds, there's the investor and they're the ones that cover the upfront costs of scaling up some kind of social service. So imagine nurse home visitation for first time moms or permanent supportive housing for homeless individuals or employment services for men and women leaving prison. So the individuals who go through these programs and as predetermined outcomes are achieved. The government then pays for success. They only repay the investors when those programs deliver their intended outcomes. So in many cases, it's a win win win. Right. So when things go well, the investor gets a return on their capital. The individuals get put on a path to health, safety, economic mobility, and the government only pays for outcomes that have been achieved. So in that sense, they've transferred all the risk to the investor. And if the program doesn't work and does not achieve those outcomes, then it's still a win in many cases because the public dollar has not been spent on programs that are less effective. So in that sense, either side of the coin is a win in a career impact bond at somewhat different. So in the same way, the impact investor provides upfront capital to cover the costs of the job training program. In this case, these programs are high quality programs that we've bedded and the ideas that we're scaling them up to low income individuals that have historically been priced out of these programs as individuals go through those programs. And if they get placed in the job, then they'll repay a portion of their earnings for a fixed period of time and up to a maximum payment cap. But the catch is that if they don't get placed into a job that gets them above a certain salary threshold, then they're not on the hook to repay. So, again, it's a win win, right? There's downside protection for the student. And if the student does get put into a job for which they are strange, then they get placed on the pathway to economic mobility and the investor is made whole on their investment. So we're super excited about both these models. They're different, but they're both incredibly important, particularly in today's day and age where you have rising income inequality, rising wealth inequality, and especially today with the COBA 19 pandemic and millions now seeking unemployment assistance. There couldn't be a more pressing time for these types of investment structures to be scaled up to measurably improve the lives of those in need.
William Norvell: Hey, Mike, William here. You said an interesting word, scale. Could you give us a little insight? What is the scale of social finance at the scale of each of those bond types, both within your organization and maybe globally, just by whatever metric that is? Just where is the industry right now?
Mike Silvestri: Yeah, great question. So social finance in the US has about 60 folks in our firm, but we're part of a global network of sister organizations with offices in the U.K., the Netherlands, Israel, India. We together as a network have really helped bring this Nates an idea of paper success into a vibrant international movement. There's now over 180 social impact bonds around the world. Almost 30 in the US alone. And these touch all sorts of issue areas, right? Criminal justice. Workforce development, health. Environment. And from the capital side. Social Finance US has mobilized well over a hundred million dollars an hour, close to 10 years of existence. And, you know, the average deal size can serve upwards of thousands of individuals and, you know, mobilize double digit millions of dollars, which is just extraordinary when you think that every dollar that returns, the investor behind that has some improved life at the end of it, which is what I find so inspiring. I'll give you a specific example in Massachusetts where I'm based. We have a deal that's taking two thousand refugees and immigrants and providing English language skills development, job training and placement services and helping them get on the path to economic mobility. This deal is mobilized over twelve million dollars and it's already starting to repay investors and most importantly, is helping people change their lives and improving outcomes for those that are in need. Which is good for them. It's also good for the businesses in Massachusetts that are realizing that they increasingly need to rely on immigrants and refugees for their own business success.
Henry Kaestner: Can you give us a little bit more detail behind this deal, Massachusetts? Or if you can't there, maybe you come up with a fictitious example someplace else. I'm trying to figure out who's paying who so I understand he purpose of this is to be able to get refugees with good paying jobs. But social finance presumably goes to the state of Massachusetts and says, listen, we know you've got this initiative to train up workforce. We want to help you to do it the best way possible. We want to increase your chances that this is a successful program and a good use of taxpayer money. So you should do the following. What is that? Who's paying who? Who are the different players in here?
Mike Silvestri: Yeah. So in a social impact bond, there's three main players. There's the investor, there's the service provider. And then there's the outcomes payer. So the investors providing the upfront costs for the service to be delivered. And obviously, the service deliver it in many cases is a nonprofit with some sort of proven intervention and take that capital to scale up the service to those in need. And then at the end of the day, the outcomes payer, which had a social impact bond, is the government, in some cases multiple government agencies, is going to repay based on outcomes. Because what we've done as part of the deal structure is come up with the cost benefit analysis for those outcomes. Right. When you have individuals that are on the public safety net that are now getting meaningful employment, that are contributing to the local economy, that's good for government. It's good for the public wallet. So at the end of the day, you have the government making payments, but those payments are based out of this mindset that we've actually invested in prevention as opposed to remediation. Right. You're investing in job training and placement and preventive services so that we don't have to spend more money downstream.
Henry Kaestner: OK, we've got two thousand refugees. They need to get job training. I'm an investor so I'm now going to pay, say, jobs for life. Two thousand dollars to provide training for these workers. And then the outcomes payer is saying, OK, if you get our two thousand of them jobs, I'm going to pay back one point four million dollars to the original investor. But if the service provider doesn't deliver, then I might have to pay something less than one million dollars, in which case the investor loses. You'd mentioned that in this case, the government of Massachusetts is the outcomes payer. Who is the investor and who is the service provider?
Mike Silvestri: Yeah, great question. So in this deal, this is the Massachusetts Pathways for Economic Advancement. Deal. And in this case, we actually have a number of investors who are deals bring in philanthropic capital, but also institutional investment. We have individuals that are investing through their donor advised funds accounts. So it's really kind of braided funding across a number of different sources. And then, you know, to your point, you're correct that the government of Massachusetts is the outcomes payer. And the way that we typically structure these deals is there's multiple different outcomes to provide some staging. Right. You have interim outcomes. You have longer term outcomes. And so the idea is that at each point, as the project is being delivered, there's a service is being delivered. You're making those repayments gradually and the investor is gradually being made whole.
William Norvell: And what's the optimal return? Are there different returns for each one or are you trying to is getting your money back the goal? Is getting a six percent return? Or does it change depending how what the different return profiles for the different types of bonds?
Mike Silvestri: Yeah, I mean, so social finance is a nonprofit. I mean, we're mission driven and we bring on investors that share our mission. And that's why we've involved over 100 investors at this point. But they also share our passion to mobilize capital to drive social progress. And nobody's getting rich off of these deals. That said, we do target mid single digit returns. And, you know, when all goes well, senior and junior lenders are able to get not just their principal back, but a healthy return enough that these deals, we believe, are scalable. And, you know, this is a structure that has potential to be scaled across the country and even the world because of the way that it recycles the capital and aligns incentives.
Henry Kaestner: Okay. I'm still working on understanding how this would apply to me as an investor. So you come to me and say, look, I know that the state of Massachusetts is willing to pay fourteen hundred dollars for every refugee that ends up getting job and keeping it for six months. We've had experience with the service provider in the past that leads us to believe that we can provide you a mid single digit return if you front the money so that these refugees can actually get the program. And what is going to happen is six months afterwards, when they're still employed, going to pay back money. And we've had, again, enough experience that we think that 10 percent of people going to fall out. But even with that, we're going to go ahead and get this accomplished. Is that kind of the pitch to the investor? Exactly, yeah. Okay. And then a firm such as Social Finance will presumably charge a management fee. Is that management fee just on the project? Does it also have a success fee to it as well? Can we do it? I'm thinking about, you know, traditional private equity is so many of our listeners right now are going to try to put this in something they know. So they know two and 20 and they know, OK. So that's right. Mike is taking my money, wants to get this outcome. And in order to do that, he's getting paid to Antwine, probably works a little differently. But how does the social finance get paid?
Mike Silvestri: It's definitely a little bit different from private equity. We typically bake in the management costs into the overall project cost. So it's part of that capital creation. And typically, we segmented into the projects, design and structuring phase. And then the active performance management and active performance management is just our language for portfolio ops. Right. In the same way that a private equity investor is actively trying to work with management to make sure that the business is running smoothly or growing. We also actively work with the service provider to make sure that as we're collecting data, that we're course correcting and making sure that those outcomes are being achieved and we're mitigating risks where possible.
William Norvell: OK. So question here, Mike, I'm interested. You used Win Win and I think win and maybe a fourth win for everyone. And so as a semi-trained investor that then raises some question. So I want to ask a little bit about the negatives. Know what would doesn't work here, because right here there's I'm really excited. Never heard of this concept to be really clear. And I'm just thinking to myself, this is amazing. This makes a lot of sense. I totally understand that. And if I could get a six percent return for something like this, that's that's really exciting to me personally. And so I'm interested. And if I was going to dig in and do some more diligence, what are the potential pitfalls or downfalls both of the investment? Maybe we could stick with this one in Massachusetts as we were getting to know it a little bit and also just the model. What are some of the biggest critiques people may have out there that are, say, not allowing you to get from one hundred million under billion? Right. Just loved to learn more.
Mike Silvestri: Yeah, all fair questions. And I think that as with any investment, there's risks involved. Right. I mean, there's performance risk is the biggest one that the service that's being delivered and the outcomes that you hope it will achieve, it doesn't materialize. Obviously, there's all sorts of other risks in terms of investors pulling out, in terms of the government outcomes, payer shifting their priorities. These are also long term deals. So we're talking about services being delivered over the course of years. And then even after the service is done, in many cases you need to track individuals over time. So there's risks involved in that time cycle. And yeah, there's risks across the investment structure. But at the same time, you know, the way we often think about risks and finances, know what's the risk that I invest and things go poorly. But I think there's also a risk that particularly for Christians. Right. What is the risk of not investing in something that has the potential to do dramatic good and measurably change a system that is stacked against individuals who are disadvantaged and in many cases, whether they can't achieve health outcomes or they can't get out of the criminal justice system or they can't get a job. And what if we can use our capital to play a role in re wiring that system for good? That's exactly what we're trying to do with these bonds.
Henry Kaestner: OK, so like William fascinated by this feeling like I probably need to take some sort of action on this. So help me understand, as a faith driven investor, whether this faith driven investor is an individual like myself or a church. How do we get involved? And I'm going to ask you a question. It might make you feel a little bit uncomfortable, because to be very clear, I think it's incredibly important and the Bible tells us this, that we can't just proclaim the good news if somebody is starving or doesn't have clothes or doesn't have a roof over their heads. And you're talking about things like clothing and shelter and food and what God made us for, which is really work. So some really basic necessities. Is your way to. And that may be enough. I think maybe a cross volunteer to go ahead. And just with that. Is there a way to bring the gospel, though, into this as well? Or is it not happen? Are you able to bring in service providers that might be able to administer these services in the name of Jesus? Or is that just pushing the envelope too much because is the ultimate payer is a municipality that would frown on things like that?
Mike Silvestri: I think it's an amazing question, Henry, and I think that we should all think through these questions, because I think that my opinion is that it's not outside the realm of possibility, but because you do have government payers involved and a social impact bond. My sense is there may be challenges with illicitly weaving in the gospel. But that said, we work with service providers, that we're founded on faith based principles. I can also imagine a future state where churches and other religious organizations play an important role in providing these services. And frankly, a lot of our investors are motivated by faith or have their capital parked at religious organizations and donor advised fund sponsoring organizations. So I think the short answer is faith plays an important role to play and pay for success. And I would love to see it play a more prominent role. The only other thing I'd say is you think about the issues that we're addressing. Right. And these issues are not Christian issues, you know, helping people gain economic mobility. Reducing prison recidivism, stewarding the environment. These are human issues. But at the same time, we as Christians do have certain beliefs that I would argue motivate us to care about these issues as much as anybody else. If not more, the belief that every human being is made in the image of God, even if they don't look like us. The belief that we are stewards of God's resources, that this money doesn't belong to us, that ultimately we are entrusted with it. These are transformative beliefs. If we let them seep into our heart and seep into our investment strategies. So I would love to see faith and the gospel completely permeate every angle by which we think about stewarding our capital to make a difference on these problems.
William Norvell: I want to take Henry's question. To be fair to say, when I heard you say at some level, which I think is really inspiring, is the number one role would probably be to become a service provider where you could be a link in the chain where I think about the Salvation Army Prison Fellowship, I know has job training where you could be a certified service provider and then have more people called to go love, especially now we're approaching 20 percent employment. Feel that God is calling them to renew the dignity and work in their life through offering job training. Then you could set up a bond such as this to fund them. That sounds like a really great place for people listening to God, maybe stirring in their heart to be a part of something like this. Is that fair?
I think you build on that. I think of organizations like World Relief that are currently hired by the government to provide refugee services. And they do that very much as a part of mystery. So there is some precedent, of course, of people working towards outcomes. But I don't think that investors are investing in these types of impact bonds. I've never done it. I'm really, really, really interested now. I've never had a guest on. Well, that's not true. We've had guests on before where I like my guests. I want to invest in with a person. But I don't know that I've ever felt as compelled in, like challenged as I do now. I mean, so just give me the wire instructions and let's get this baby going. Let's make it happen. OK, so let's look at this a little bit more rather than just asking a question in our own personal circumstance. As you reflect on this is a Christ follower. What do you see as the opportunity as a church when you come back and haven't seen a successful job? I think that you'll have done 130 of these now around the world. Is that right?
Mike Silvestri: So there are 180 around the world, social finances. You know, one of the few pioneers in this space in the US alone is close to 30 deals.
Henry Kaestner: OK, so 30 deals as you come back and you look at the successful implementation. What are your hopes? How would you like to see a church get involved? Do you have faith based institutions that are part of your investor base right now?
Mike Silvestri: We do. I mean, the capital stack and some of our deals has benefited from capital, from faith based donor advised sponsors or even just individuals that may or may not be motivated by faith, among other things. I think there's a huge role for the church to step up and to play a leading role in this space. I think, you know, I grew up in a church where we talked a lot about financial stewardship. And I often think about stewardship and kind of a binary way. Right. There's good stewardship in philanthropic terms. Right. Am I being generous in my tithing and am I giving. And then there's good stewardship in investing terms, like, am I maximizing my returns? But while I think that's binary view, it's simple and it's easy to understand, it doesn't easily accommodate opportunities in the impact investing space. Right. Opportunities where you can truly make a measurable impact on the lives of those in need, that the lives of people, the likes of which Christ spent so much of its time while you is here. The hit and the hurting that helped us and do that all the while getting a return on your capital so that the impact is actually multiplied. Right. It's not just one time where you can really invest and reinvest and reinvest.
Henry Kaestner: So Mark Andriessen once said, just to help put some color around this Mark Andriessen once famously said, actually, I guess Mark Andriessen said it and then Warren Buffett famously said it. I will buy a house or I will buy a boat, a house being an investment or boat being giving. But I will never buy a houseboat because he had been asked, what do you think about impact investing? And it sounds like to me that you're suggesting that Christ followes need to wade into the houseboat market. Need to endeavored to understand How do you balance the two? And maybe life doesn't need to be so binary. Is that what you're suggesting?
Mike Silvestri: I think that's right. I think it comes down to what are your goals and what are your priorities? And I think that when we think about investing, we often assume that, well, you know, our our fiduciary duty is to maximize returns. Well, first of all, there's no fiduciary duty to maximize profits. We do have a fiduciary duty to our stakeholders. We also have a biblical duty to all stakeholders and a biblical responsibility to care. Our society about widows, the orphans, the unemployed, the immigrants, the refugees. And so I find myself challenged when I reflect on how am I stewarding, truly stewarding the money that has been entrusted to me? Am I doing it in a way that is, at the end of the day, seeking to preserve capital, you know, preserve my own wealth, increase my comfort? Or am I being creative, imaginative and where necessary, sacrificial with it? And I think that doesn't necessarily mean philanthropy. I think that we can be imaginative and creative and at times concessionary with our returns. If it means that we're stewarding our capital to achieve maximum social outcomes. Right. To uplift those who are most marginalized, some of us. That, I think, is a arguably more balanced view of what our duty is as investors.
William Norvell: It's a great place. That's a great place to finish. You know, it's a great challenge for for all of us and all the future investors. That's why we do this podcast, is to get people thinking. And then there's there's a lot of gray and there's a lot of different conversations to be. And I'm just really grateful for you to come on in and start a new conversation that I know I have not really been a part of.
Henry Kaestner: Yeah, I am, too. And this makes me think that this is a great opportunity to hear from our listener base to lots of different opportunities here. I think that most of our listener base knows of service providers that are working towards social outcomes, many of whom have very much a crisis center message to them. I'd love to hear back from the ideas that they have, maybe service providers they know they can really deliver. And then I'd love to go back to Mike and just say, okay, so we've found a universe of service providers that are doing these things. How do we construct a vehicle? How do you construct a vehicle and then have more folks know about it? Now, you would, of course, suggest, Mike, that that might be interesting, but there actually are 180 different vehicles that already exist where the church can participate right now. I do wonder, though, if there's more of a pure play on working with some of these ministries. But let's hear from the audience. And, you know, great time for you all to get onto the site. Faith driven investor, dawg. Leave some comments and leave some comments in the notes that this podcast. But I've been challenged in a way that I'm not frequently by guests. And so, Mike, I really appreciate that.
Mike Silvestri: Thanks for having me.
William Norvell: Yeah. You're not off the hook yet. Oh, he's not. Our last question, Mike. We'd love to ask as we love to connect our listeners with our guests through God's word. We think it's just amazing to see how God continues to show his words, living and breathing. And so if you wouldn't mind if we take a second and think through. But a place in God's scripture where he may have something coming alive to you in a new way could be this morning. Something you read could be the season, something you've been meditating on, that he's just point your new direction. If you wouldn't mind that be awesome. If you could share with our audience where he has you today.
Mike Silvestri: Thanks for the question, William. You know, I think on the answer to your question, that verse, Mivah 6:8 comes to mind, which I think I'm always challenged by. And I was challenged to memorize it as a young kid, but I'm challenged because it's so simple. And for people like me and maybe folks listening to this, I imagine that it's easy to overanalyze and overcomplicate things sometimes. Even some of these deals that we've talked about are very complicated. But, you know, God tells us in Micah 6:8 that what's required of us is to act justly, to love mercy and to walk humbly. And that's a pretty simple command, but it's also an incredibly difficult one to obey. And so I offer that simply as a verse that challenges me and hopefully challenges those who are listening as how we can go about our daily lives, go about our work and go about our investing.