Urban Institute
Research Analyst
Urban Institute
Policy Program Manager

Future of PFS: 5 questions funders ask before investing in PFS

October 19, 2017 - 1:51pm

A defining feature of pay for success (PFS) is the shifting of financial risk from government to private or philanthropic investors. This makes securing suitable investors an essential component of PFS project structuring. But what do investors look for in a PFS project? At the 2017 National Symposium on the Future of Pay for Success, we heard from four leaders in PFS impact investing: Andi Phillips of Maycomb Capital, LLC, Deborah Kasemeyer of Northern Trust, Ellen Ward of Living Cities, and Allison Clark of the MacArthur Foundation. We’ve boiled down their insights on how they decide whether to invest in a PFS project into five questions.

1. Does this investment align with my organization’s mission?

Most investors—PFS investors included—seek to make investments that align with their organization’s mission. For Phillips, that means ensuring that the project makes an impact on a poverty-related issues. For Ward, that involved determining whether or not the project could improve the lives of low-income individuals of color. And for Kasemeyer, it’s important that the PFS project fill a true “capital gap” rather than replace existing funding. These considerations reflect the importance of securing partners for a PFS project who are aligned around shared goals.  

2. What does the data say about the potential for project success?

We’ve written about the variety of risks that PFS projects pose to investors. One way that investors can assess those risks is by looking at the evidence and data. Ward indicated that the Denver Social Impact Bond Program went relatively smoothly because of the amount of time and resources invested in collecting data on the target population. Examining existing data and any prior evaluations of the intervention can help investors gauge the probability of the PFS project’s success and determine if they are willing to invest in the project despite the risks.

3. Is the program structured as a replicable model?

“Foundations have an interest in scalability and replicability,” according to Clark. This perspective was echoed by the other investors on the panel, who indicated that they were more interested in PFS projects from which certain aspects could be adapted and re-used in future efforts. In other words, investors are looking for projects that can offer a benefit to the entire PFS field, rather than just to the jurisdiction doing the project.

4. Is there a government champion for the project?

A government champion can range from a staff member in the Governor’s office to a county executive, and can be the difference between a PFS project that moves forward and one that does not. Given the extended time horizons of many PFS projects, it is especially important that these efforts maintain a government champion beyond administration changes. Government champions can drive PFS project development by being the external face of the effort, forging strategic local partnerships, and being accountable for progress. To investors, a government champion signals that the local government is committed to the PFS project and is a viable end payor.

5. Can the provider deliver the desired results?

PFS project success—and consequently, repayments to investors—hinges on the ability of the intervention to achieve the pre-determined outcomes for the target population. That, in turn, depends on the service provider’s ability to properly implement program activities and services. Several Symposium panelists stated that they prefer to work with service providers to scale what the providers were already doing, rather than with providers who are new to the intervention model. Investors are also interested in whether the service provider has a track record of working with the specific target population.

An overarching theme of the panel was the need for communities to tailor financial tools like PFS to fit their specific challenges. At times, pay for success may be a jurisdiction’s best option to tackle a social issue, but in other cases, it could be a grant or a different results-based financing agreement. This Symposium panel highlighted what exactly investors look for in a PFS project - but ultimately, a drive to improve outcomes for the people you’re serving what motivates government stakeholders and impact investors alike.


This is the tenth blog in our Future of PFS blog series.

On June 22nd and 23rd, 2017, the Pay for Success Initiative hosted a National Symposium on the Future of Pay for Success in Washington, D.C. The invite-only Symposium brought together leaders from government, nonprofits, and organizations active in pay for success to consider the big questions facing the field, as well as highlight lessons for engaging in PFS efforts. More information on the Symposium can be found here.

Over the next several months, the Initiative will be releasing a series of blogs highlighting important conversations, themes, and questions that arose during the Symposium. To join the conversation, visit pfs.urban.org, @UrbanPFSI and #FutureofPFS on Twitter, and subscribe to our monthly newsletter.

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As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research. Photo via Shutterstock.