It isn’t often you hear J.B. Pritzker talk about the wisdom of investing in something that aims for 5 percent returns.
But that’s what the co-founder of private-equity firm Pritzker Group is shooting for with Goldman Sachs in a joint investment of $7 million in a Utah program that helps academically at-risk preschoolers get up to speed for kindergarten.
The idea is that investing a small amount in intervention now will head off much bigger required spending later on special education if the children don’t meet the academic standards for kindergarten. One of Mr. Pritzker’s philanthropic interests is early childhood education.
“Early childhood education is what brought me to the table. As someone interested in social policy, what a great way to solve social problems,” Mr. Pritzker told me last week after the investment was announced at the Clinton Global Initiative. “If you can get private investors to fund public functions and have government reap an enormous return, what a great solution in a tight fiscal time.”
United Way of Salt Lake is betting that the savings from keeping kids out of special-education, which is much more expensive than providing standard instruction, will provide the repayment to the investors.
The returns are relatively low — about 5 percent. That’s not going to make anyone rich, but neither are T-bills.
“I’m not in the business of investing for 5 percent returns, but I’m interested in improving education,” he said. “There are portions of people’s portfolios invested in low-return opportunities, like treasuries. If you can prove this out, Goldman, Fidelity and other investors who put large amounts of capital into bonds, they could put them into social-impact bonds.”
Mr. Pritzker argues that the long-term social and economic impacts of keeping kids out of special ed are much higher. “Kids (in mainstream classes) are 25 percent less likely to end up in jail, 30 percent more likely to get a job,” he said.
It’s the second social-impact bond. The first was in New York and involved an intervention with juvenile offenders sent to Rikers Island to keep them from returning to jail or prison.
Another possible use for social-impact bonds is in health care, investing in additional services such as trauma-room care to prevent patients from being readmitted or showing up at an emergency room for problems that could be eliminated through less-expensive preventative care.
“It only works where there is required spending,” Mr. Pritzker said. “Shockingly, it’s not something governments have been willing to do. They don’t look at savings as something you use to pay off an investment.”
For such bonds to become commonplace, investment banks will need to spring up to bring them to market. “There’s no infrastructure today. We’re creating a new market.”
Click here to read the original article.