Silicon Valley’s Investors Take On The Prison Industrial Complex

During the South Carolina debates, former Vice President Joe Biden, brought the private prison industry into the news again, when he criticized his opponent for investing in them in 2004.

Investing — and not investing — in the criminal justice landscape has become a hot topic of conversation throughout Silicon Valley. The US locks up more people than any other country in the world, and the high rate of recidivism shows that this punitive system is failing. This has a knock on effect, in terms of the economy, according to researchers. “The role of crime acts as a stoppage on the progress of the economy in terms of growth,” noted Michael Rocque in a 2019 paper.

A report from socioeconomic researchers Edoardo Otranto and Claudio Detotto in 2010, stated this stronger terms : “Criminal activity acts like a tax on the entire economy: it discourages domestic and foreign direct investments, it reduces firms’ competitiveness,” they noted.

Venture capitalists have taken different approaches to tackling this problem: Chris Redlitz, a partner at Transmedia Capital, developed and funded coding bootcamps for prisoners, First Round Capital invested in Promise, a bail reform app, and Kapor Capital invested in Edovo, a tablet based education and rehabilitation system for inmates, to name a few.

These startups address recidivism, education, and reform, but that’s working from the outside in, so to speak. This leads to the question of approaching it from the other way: the incarceration complex itself. What impact can investors and activists have on the private prison industry? And what’s in it for them?

“The return for private prison investors were down 30% in 2019, compared to other real estate investment trusts (yes, private prisons are classed as real estate),” said Jasmine Rashid, the director of Real Money Moves, the nonprofit arm of impact investment firm The Candide Group. “They’re significantly underperforming.”

Rashid spoke on a criminal justice panel, during the four-day Social Capital Markets conference in San Francisco. The tagline: dedicated to accelerating a new global market at the intersection of money and meaning. 

Around 4,000 venture capitalists, social entrepreneurs, and impact investors attended the event, all interested to learn how they could direct their money to good causes, while turning a profit.

It’s taken a concerted effort to get to this stage. The bottom line used to be everything for investors, but many of today’s investors are focused on profits alongside people.  “Our jails and prisons are failing at their primary purpose — — rehabilitation — which means more crime, more violence, and more broken families,” blogged partner Ben Jealous, on the Kapor Capital blog. “A class of social justice-oriented companies has emerged as a counterweight to the prison-industrial complex.” 

In particular, many investors are pushing for institutions to distance themselves from funding companies that invest in imprisonment. “People don’t want money they invest for their family to go towards locking up other families,” said Rashid.

At KNGDM Impact Fund, managing partner and former NFL linebacker Derrick Morgan manages a $50 million fund, plus a $200 million fund in partnership with Activate Capital. He’s focused on real estate investments and startup businesses, and is vocal about defunding the private prison complex. “When funds take a passive role, that doesn’t sit right,” he said during his SoCap panel. “I sleep well knowing my money is working in positive ways.” Morgan’s solution is to place funds elsewhere, especially directed at historically underserved minorities and low-income areas that have been hurt by over policing.

At Presente.Org, a LatinX activist organization, executive director Matt Nelson takes a different approach. He’s targeted the institutional investors, who’ve enabled the private prison industry to thrive. Through a mixture of protests, campaigns, and one-on-one meetings, Nelson communicates how the community feels about this, and explains how their money is being used. “Locking people up for profit is akin to slavery,” he said. Over 500,000 people are in Presente’s network, and when Nelson deploys them to protest banks or companies, their sheer volume makes a difference. “We have a financial argument and a moral one,” he said.

Private prisons are no joke. Over 120,000 people are housed in them across the US, reports The Sentencing Project — that’s 8.2% of the entire prison population. Increasingly, they’re used by ICE for immigrant detention. The two main companies who run these are The Geo Group, and Core Civic (formerly Corrections Corporation of America); with revenues of worth $2.48 billion and $1.98 billion respectively for the 2019 fiscal year.

Private prisons pose many ethical problems. For one, they farm out care to private companies, which focus on their bottom lime, rather than inmate care. Studies have found that private prisons have 28% more inmates on inmate assaults and twice as many inmates on staff assaults compared to federally funded prisons. That’s generally attributed to the private companies cutting costs; they hire less staff, provide less training, and spend less on medical care than the public prisons.

Nelson’s arguments have convinced institutional investors to pull $300 million plus from funds supporting these institutions, including J.P. Morgan and Wells Fargo.

Technically speaking, institutional investors and the big banks aren’t intentionally funneling their money directly into the prisons. They invest their money into index and ETF funds, and as CoreCivic and The Geo Group are publicly traded companies, they’re often included in those packages. It’s complicated for their shareholders to divest themselves from these — some say they’d have to scrap the whole index. 

“Private prisons are a new phenomenon, but the idea of profiting and commodifying off vulnerable communities is nothing new,” Rashid said. “Their business model is to lock up as many people for as long as possible.” She’s hopeful that where empathy has failed,  their data will win out. Rashid highlighted research that reported that states paid $1,600 more per year to house someone in a private prison, instead of a state run one. Additionally, that the facility led to more inmate violence and a 20% increase in recidivism. “We have 30 years of data,” she said. “It’s intuitive when you think that their core business model has no extra cash for training or rehabilitation.”

One reason that the private prison companies have been so profitable is that they’re structured as a real estate investment trusts, and they get the tax and dividend perks that come with that. But it does make them vulnerable, with the SEC ruling that they must distribute at least 90% of their taxable income with shareholders. 

“That makes them reliant on loans and lines of credit,” said Rashid. Get to enough banks, and you get to the end of private prisons. So far JPMorgan Chase, Wells Fargo, Bank of America, BNP Paribas, SunTrust, Barclays, Fifth Third Bank and PNC have pulled out of, or are in the process of severing funding links with private prisons. With less and less credit lines, these stocks have been downgraded from stable to negative by Fitch Ratings. In 2019, California banned all private prisons, and the state of Washington is considering implementing a similar ban.

“Private prisons are now in mainstream conversation,” said Rashid. “It’s political. The people don’t want them, and investors are paying attention to that.”