Urban Institute
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Urban Institute
Research Product Manager

Leveraging new resources for pay for success and impact investing

December 7, 2017 - 12:23pm

Earlier this year, two large pools of resources were announced to generate greater investment in impact. These funds, one from the Ford Foundation and the other led by the Reinvestment Fund, take different approaches to catalyzing change, but both bring additional capital to spur innovative investments.

The Ford Foundation made a big splash with a commitment of $1 billion from its endowment toward mission-related investments (MRIs). For decades, the Foundation has issued grants using 5 percent of its total assets, while the remainder accrued financial returns to maintain their grant-making ability. But as its president, Darren Walker, stated, “If philanthropy’s past century was about optimizing the 5 percent, its next half century will be about beginning to harness the 95 percent as well.” The Foundation believes that these MRIs can achieve social justice goals aligned with its mission, while still securing financial returns large enough to maintain the health of their endowment. The Foundation initially plans to focus on affordable housing in the US and access to financial services in emerging markets.

The Reinvestment Fund also announced a new commitment to impact investing: the creation of a $10 million fund dedicated to supporting pay for success (PFS) projects in the United States. While the Reinvestment Fund is leading this new “PFS Fund” and is committing $1 million from its core loan fund, it has also engaged two partners: QBE Insurance Group, which will invest $7 million, and Living Cities, which will invest $2 million.

Confidence in the impact investing model

The funding commitments, as well as the reputations and track records backing those funds, demonstrate confidence in social impact investing and in the PFS model specifically. These two funds bring significant resources to their areas of focus, but more importantly, they have the potential to leverage additional resources and generate shareable lessons to help expand their impact markets. The Ford Foundation’s use of a substantial portion of their endowment for impact investing could be particularly consequential to the field: it could encourage other organizations to invest their assets—including pension funds, university endowments, sovereign wealth funds, etc.— into social programs as opposed to more traditional investments. This would be an entirely new and untapped source of funding for promising social services.

These long-term funding commitments also signal a sustained appetite in the impact investing market. This is particularly important for PFS, where the market remains small, with only a handful of repeat investors, and where Congress is currently considering a bill to triple the Federal resources available for outcome payments.

Increased efficiency in project planning and structuring

These funds may improve the way investments are made, transactions are structured, and the ease with which contracts are written. As Nonprofit Quarterly has noted, information made available on Ford’s investment methods could inform other investors on how MRIs are chosen, how social value is assessed, and how the investments perform financially. Additionally, managing large funds that will be invested in many projects means that Ford and the Reinvestment Fund will be able to apply lessons learned across their projects.

The PFS Fund, in particular, has the potential to help build the PFS market by developing broad expertise in the field and carrying forward lessons learned across multiple projects. Collecting lessons and applying them to future projects is especially valuable for PFS where high transaction costs can discourage governments, service providers, and others from pursuing projects. In fact, as Next City describes, the PFS Fund will reduce transaction costs by pooling money into a single fund and taking a portfolio approach. This helps streamline structuring by consolidating several investors into one fund with aligned interests with a single manager where capital from successful projects can be recycled into new projects—assuming the fund invests in more successful projects than unsuccessful ones.

What’s next?

Since investors have different motivations for investing in PFS, a pooled fund, which adopts a shared vision and aligned approach may not be for everyone. On the other hand, such an approach, where most tasks are delegated to a fund manager, may be attractive to less hands-on investors, thus expanding the universe of investors interested in PFS.

Time will tell how these new developments from the Ford Foundation and the Reinvestment Fund play out in the impact investing field—and in the pay for success field specifically—but there will surely be an audience of potential investors and other stakeholders watching intently. 

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