Urban Institute
Research Assistant
Urban Institute
Policy Program Manager

Impact securities: A new twist on pay for success

June 14, 2018 - 2:38pm

Last month, NPX, a San Francisco-based start-up, announced the launch of the first donor fund to implement their innovative financing mechanism, the “impact security.” This fund will support The Last Mile, a nonprofit that provides coding education and vocational training to incarcerated people. The impact security itself is similar to the pay for success (PFS) model in that investors provide up-front funding for a nonprofit, and if that nonprofit achieves pre-agreed outcome targets, one or more end payors will repay the investors with interest. However, unlike PFS, impact securities are designed with philanthropic donors, rather than governments, playing the role of end payor. In addition, impact securities could be more attractive to a wide range of investors because, unlike highly bespoke pay for success deals, impact securities are standard debt securities (with variable returns tied to performance). This means that they use widely understood language and documentation and can be transferred or liquidated by investors.  

In this first impact security project, a group of 11 investors put forward $800,000 in up-front capital to finance The Last Mile’s web development shop inside San Quentin State Prison, the first such effort in a US prison. Over the next four years, partners will determine the project’s impact by measuring the number of hours inmates work, with a goal of 18,000 hours worked by incarcerated program graduates. If the goal is met, investors will be repaid with a return, for a total of up to $900,000. Instead of a government serving as the end payor the way they are in the PFS model, investors will be repaid by a fund currently supported by 16 donors (including prominent philanthropists such as Omidyar Network, The San Francisco Foundation, Richard Branson’s Virgin Unite, David Pottruck, and others). Investors stand to lose some or all of their investment if The Last Mile fails to achieve its goal, while the set of 16 donors would direct their committed funds to other projects.

This new mechanism adds to the growing impact investing field and its principle of paying for outcomes. By engaging the philanthropy community as end payors, the impact security is marketed to donors who want to ensure they’re paying for what works. And just like the pay for success model, investors are rewarded for supporting social programs, and service providers secure access to the funding they need and an opportunity to prove their impact.

One concern that remains unaddressed is the new model’s sustainability. While a nonprofit may hope that demonstrating results during the life of an impact security will prove the value of its services value to donors, there is no guarantee. There may be a funding cliff where even well-performing providers lose support after the project ends.  While this challenge is also present in PFS projects, it’s potentially more pronounced for impact securities because governments may be able to more easily integrate impactful providers into their network of procured service providers and governments are not the typical end payor in an impact security.

However, whether this concern is borne out remains to be seen. In the meantime, it’s worth acknowledging the potential step forward that the impact security heralds. By creating a standardized, easily replicable, and marketable instrument, the impact security could increase the amount of performance-based funding available to nonprofits and give a boost to innovation and results-driven decision-making in this sector.

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