Pay for Success: To Invest Or Not To Invest?

Pay for Success: To Invest Or Not To Invest?

The Pay for Success field continues to gain traction. Our new blog series will walk you through how Living Cities decides which Pay for Success projects to consider investing in, in the hopes that others can harness our lessons learned to inform their own work.

Three years ago, Living Cities made our first Pay For Success (PFS) Investment in the Massachusetts Juvenile Justice Pay for Success Initiative. This project, developed by the Commonwealth of Massachusetts, Third Sector Capital Partners and Roca, was designed to improve outcomes for hundreds of at-risk young men in the probation system or who are leaving the juvenile justice system in the Greater Boston area.

We believed that the PFS model showed great potential for achieving better outcomes across the board…

PFS was new to the U.S. (at the time) and our team took a jump. We believed that the PFS model showed great potential for achieving better outcomes across the board— higher-performing programs, more innovative government processes, more impactful investments and, ultimately, better results for low-income people.

Continued Investment

Since 2013, Living Cities has invested in two additional PFS transactions and made three PFS Construction loans. Each project we’ve been involved with– whether or not we ultimately invested— has informed our thinking on the potential PFS has to be a tool to get better outcomes for low-income people. And with every investment we’ve made, we’ve gotten better at identifying the elements of a transaction that are early indicators of a PFS project’s long-term success. Last year, based on some of their lessons learned, Eileen Neely, the Director of Capital Innovation at Living Cities and Andy Rachlin, the Managing Director of Lending and Investment at Reinvestment Fund, put out the 4 Ps of Pay for Success framework, as an alternative to the 5 Cs of credit to help other PFS investors address the “how likely are we to get repaid” question.

A New Screen for a Growing Field

We realized we needed to be more strategic about which opportunities we pursued, and that we needed a screen…

Until recently, there have been a limited number of PFS transactions from which to choose, so we’ve been able to use the 4 Ps framework to effectively assess PFS projects. As the PFS field has continued to gain traction, however, we have seen a greater volume of projects coming to the market. According to our June 2016 Field Scan, there are now over 65 PFS projects at various stages of development, from early-stage feasibility to those projects seeking investors. We realized we needed to be more strategic about which opportunities we pursued, and that we needed a screen before we got to the 4 Ps framework that could help us decide which PFS projects to consider. In addition, in recent months, we’ve also been asked with increasing frequency what we as an investor look for when we’re deciding whether or not to invest in PFS projects.

Our Initial Screening Criteria

We spent the summer drafting and testing a set of initial screening criteria designed to assess whether a project is a good use of the PFS model, and if it is a good fit with Living Cities’ programmatic priorities. We then honed the criteria based on feedback from Living Cities staff, members and our Blended Catalyst Fund investors. Our initial screening criteria will likely evolve as we continue to learn. But in the Living Cities spirit of open-sourcing what we’re learning in real-time, we’re sharing our criteria now in the hopes that others will be able to use it to inform their work.

Resource: Pay for Success: Living Cities’ Initial Screening Criteria

When Living Cities invests in Pay For Success, we look for: impact; innovation; collaboration; a government champion; and programmatic significance.

PFS Initial Screening Criteria Categories: Impact, Innovation, Collaboration, Government Champion and Programmatic Significance

Over the next five weeks, we’ll be exploring each of our initial screening categories in more depth. Check back in on Tuesdays for the latest post, and share your own thoughts and feedback!


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