Innovations in Pay for Success: Investing in a First-of-its-Kind Pay for Success Fund

Innovations in Pay for Success: Investing in a First-of-its-Kind Pay for Success Fund

It’s been five years since the first Pay for Success transaction closed in the U.S. At Living Cities, we’ve been asking ourselves: “Five years later, what has Pay for Success (PFS) achieved and what does its future look like?” Our new blog series will share reflections from us and our partners on new directions in PFS. Follow our Pay for Success Newsletter for updates!

A few weeks ago, Reinvestment Fund announced its first-of-its-kind $10 million Pay for Success (PFS) Fund. The PFS Fund will make senior loans in the amounts of $2-4 million per transaction in PFS projects across the U.S. that are supporting the scaling of promising policy interventions in social services, health care, housing and education. We’re thrilled to be a part of the PFS Fund’s first close with a $2 million investment and to bring the learning we’ve gleaned from our own PFS investments to the brain trust of this Fund.

Accelerating the Evolution of the PFS Market

When we reflect on our experience in the PFS field these past five years, one of the major barriers to scaling PFS has been the difficulty of organizing capital. To date, all the layers of capital in Pay for Success transactions have been sourced on a deal-by-deal, investor-by-investor basis, creating substantial inefficiency for the investment lifecycle and underwriting roadblocks for investors. All in all, underwriting at the transaction level just doesn’t make sense for most investors economically. As of March 2017, out of the 42 publicly acknowledged PFS investors, only 14 have invested in multiple projects – which means 29 have just invested in one project.

The PFS Fund will overcome this barrier by blending capital from Reinvestment Fund, commercial capital and philanthropic capital in one fund, in a way that’s similar to our own Blended Catalyst Fund. Reinvestment Fund will use their expertise as one of the early investors in PFS to source and underwrite transactions on behalf of investors, drawing upon the experiences of QBE Insurance Group and Living Cities.

By organizing capital, the PFS Fund has the potential to increase efficiency in the transaction structuring process and lower transaction costs, since there will be fewer parties at the table. And because Reinvestment Fund plans to take up all or a majority of the senior debt in investments through this Fund, they will have the power to push for terms that make transactions more replicable in the long-term.

By organizing capital, the PFS Fund has the potential to increase efficiency in the transaction structuring process and lower transaction costs.

Blending Expertise of Experienced Partners

Reinvestment Fund is a long-time partner of ours and is philosophically aligned with Living Cities, supporting transparency and the sharing of lessons learned in real-time. Like Living Cities, Reinvestment Fund has been an early investor in the PFS field, and we collaboratively developed the 4 Ps of Pay for Success framework for underwriting PFS investments.

One of the most exciting elements of our partnership is the combined breadth and depth of experience of Reinvestment Fund, QBE Insurance Group and Living Cities in PFS transactions. If you combine our investments, we’ve invested in over half of the PFS projects launched (9 of 17) in the U.S. to date. QBE brings its global experience to the table, allowing us to compare trends we’re seeing in the U.S. market to other markets like those in Australia and the U.K.

As our President and CEO Ben Hecht said upon launch of the PFS Fund, we have seen the power of PFS as a tool in driving higher-performing programs, more impactful investments, more innovative government processes, and continuous improvement amongst project partners—all while maintaining a shared focus on outcomes that will measurably improve people’s lives. Five years after the first PFS transaction closed in the U.S., we think Reinvestment Fund’s PFS Fund takes an important and necessary step forward in setting the stage for the next five years of PFS.


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