Their paths to Pay for Success and the future of impact investing
Jackie Khor and Andrew Chen joined Social Finance in January 2020 to lead essential social investment work, most notably, the continued development and expansion of the Career Impact Bond (CIB) strategy. We talked with them about how they came to Pay for Success (PFS) and what they think lies ahead for the impact investing space.
What drew you to Social Finance and PFS more broadly?
Andrew: As I get older, I think about this more and more — how being an immigrant has made a big difference to me and changed my outlook. I came to the US when I was a child but only as an adult have I realized how difficult it must have been for my parents. The financial system doesn’t work well for immigrants. For example, my parents couldn’t get mortgages because they didn’t have credit histories and it was difficult for them even to set up bank accounts. I consider myself lucky because not everyone gets the opportunities I have had. But I think we can do a better job integrating different segments of our society.
People ask me how I started in engineering and jumped to this impact investing niche. I tell them that they may be different fields but they both center on addressing systemic issues and use the same sort of mental tool sets. As an engineer, I was designing more environmentally sustainable products by accounting for market mispricings and related structural issues. In impact investing, I am also dealing with market failures and figuring out how we can redefine ROI and realign value.
Jackie: I’ve been fortunate enough to work in multiple spaces — the capital markets, the nonprofit sector, and philanthropy — that Social Finance navigates. So the organization represents a natural point of confluence for me. Using capital to drive positive social and environmental outcomes has been a through-line in my career for the past 30 years.
Social Finance has evolved to encapsulate version 3.0 of impact investing. Here, it’s not only about mobilizing capital and channeling it into specific impact investing opportunities but also working with government to inform policy. To create the systemic change Andrew was talking about, you’ve got to affect policy and influence how governments spend money by incentivizing or disincentivizing certain behaviors.
Each of you come to Social Finance with extensive impact investing experience. Jackie, you helped pioneer impact investing as a cofounder at Imprint Capital, and Andrew, you oversaw community development venture capital (CDVC) work at BlueHub. What got each of you interested in the field and how do you see it developing in the near future?
A: My CDVC work was very much an extension of the kind of investing I was interested in anyway. Way back when there was no such thing as double bottom line-investing or impact investing, I was particularly interested in work related to fields like environmental sustainability and advanced manufacturing — areas that people weren’t really thinking about at the time. I realized that once you started layering technology into certain businesses, you could get a leveraging effect with more growth yet lower risk.
In those days I wasn’t thinking about workforce development because I didn’t have that background. Later, after I got into CDVC, I found opportunities to incorporate catalytic capital and technology into investments that also positively impact our communities.
J: CDVC was one of the early sectors that had opportunities for impact investing primarily because there were subsidies like low-income tax credits that incentivized the private sector to invest in affordable housing and other community development projects. So I did work in that space on the investment side at the Rockefeller Foundation.
A: You guys invested in us!
J: Yes, when I was at Rockefeller, I invested in Andrew’s first or second fund. But recently I’ve been working in education. During the 19th and 20th centuries, education was the great equalizer and now it’s become the great divider. Research shows that educational access is one of the key determinants of individual opportunity. But today access to education is based on the zip code you were born in or where your parents went to school. That’s anathema to the American values system.
“During the 19th and 20th centuries, education was the great equalizer and now it’s become the great divider.” —Jackie Khor, Vice President of Social Investment, Social Finance
A: One of things Jackie touched on is that a lot of what makes impact investing work is because somebody, whether it’s someone at Rockefeller’s Program Related Investments program or the type of impact investor we’re tracking now, can provide the kind of capital that expands the return window. The traditional internal rate of return (IRR) methodology doesn’t always work. You need patient capital for the boldest investments.
At Social Finance, I think we’re broadening the definition of capital and encompassing a lot more possibilities.
J: We’re also broadening how you think about return. Ever since the early days of impact investing, people in the space have struggled to articulate and quantify non-financial return — the explicit reason investors would be making impact investments, especially if they might be willing to get a lower IRR. They want to understand the environmental or social returns they might get. The outcomes-rate card and some of the other tools that undergird PFS help us tackle the big fuzzy challenge of articulating non-financial return.
Another big challenge within the space is externalities. The reason why there are market failures like the ones Andrew mentioned is because the environmental and social problems we are trying to deal with belong to everyone. As a result, there’s no way investors can capture the benefits of their investments. The key is articulating the non-financial return so investors can say, “I’m going to accept a 3% return because I’m helping address an important problem on behalf of society.”
As vice presidents of social investment here at Social Finance, your portfolios obviously encompass many distinct projects. Are there specific pieces of PFS work you’re excited about?
A: I’ve known about Social Finance for a long time and the Social Impact Bond (SIB) concept has always been very interesting to me. But, I’ve also been worried about being dependent on government payors. Appropriation risk is frankly something you can’t really solve — you may need external private capital sources to provide loss reserves. So with SIBs, you have to strike a delicate balance.
CIBs could make PFS ubiquitous. The current model for paying for education is broken and figuring out an alternative is massively important. The gap between the have and have-nots within the education space, especially in this country, is huge, and COVID-19 has only worsened the situation. So I’m really excited to use the CIB to build more pathways to economic opportunity and address the problem.
The other thing I’m excited about is the environmental sustainability and resiliency work. It’s an ideal fit for the PFS model. What’s the outcome? We don’t burn ourselves off of this planet. That outcome is obvious and gigantic. And there are just so many cool technologies we can leverage by marrying the right capital to the right deployments.
J: I agree with Andrew that CIBs are going to be huge in a relatively short period of time, particularly in the current budget constrained environment. However, what I’m really excited about is the culture and the people here. I’m excited by the quality of people I’ve met here and they’re passion for leveraging capital to address important social problems.
Andrew, have you had a similar experience with the culture at Social Finance?
A: Absolutely but it’s not just about Social Finance. This latest generation of professionals is so different. When I was getting out of college, everyone’s dream job was in investment banking or management consulting or on Wall Street. Then there was a shift toward technology. These days, I think people are much more discerning about how they want to spend their lives — it’s about quality and integrating with the world around them. People are looking at opportunities that are about more than financial gain or career building. I’m really frankly shocked. I see it in my daughter and Jackie, I’m sure you see it in your kids. Their metrics are different.
J: About time. We have a responsibility as the world’s largest economy to make sure we don’t screw up the planet. Our kids realize they can’t wait and have to do something now. And in the past, at least in my generation, there was this idea that the private sector, government, and the nonprofit sector should work independently. Now people are beginning to realize you need to work across all sectors to affect change, and that’s what Social Finance does.
“Now people are beginning to realize you need to work across all sectors to affect change, and that’s what Social Finance does.” —Andrew Chen, Vice President of Social Investment, Social Finance
A: The old fashion way goes, “I’m going to make a ton of money and then give it away.” But now everyone understands that every action you take has to be balanced.
J: Yes, but we also have to acknowledge that we benefit from the thinking, the iteration, the mistakes, and the success of an earlier generation of thought leaders and impact investors, both individuals and institutions. We’re contributing to the evolution of the space but we’re where we are because of many other people before us.
A: The crackpots are no longer crackpots — they’re visionaries.