Impact investors—from individuals, philanthropies and foundations, to CDFIs and major financial institutions—are looking for innovative and meaningful ways to make a both a social and financial return. Pay for Success gives them an opportunity to invest in their communities by supporting high-quality programs that improve the lives of those in need.
Investors can use their capital to drive social change, building portfolios that reflect their values. There are many types of impact investments available through mutual fund companies and investment advisors, like socially responsible investments (SRI) or Environmental, Social, Governance (ESG) Funds. Compared with other forms of impact investing, Pay for Success offers a direct connection to social outcomes—life improvements are the source of social and financial returns.
How it Works: Impact Investors
Investors provide the upfront capital necessary to bring the intervention to scale. For service providers, access to this flexible, multi-year funding enables them to focus on program participants and deliver the highest quality programs. The service providers in Pay for Success projects have a track record of successfully delivering social programs with demonstrated evidence of impact. In the Pay for Success development process, Social Finance performs deep due diligence on service providers, including an assessment of how well they can handle an infusion of scale capital. Unlike traditional public and grant funding, the capital provided is unrestricted, allowing service providers to make course corrections throughout service delivery to improve results.
Throughout service delivery, an independent evaluator measures the results of the project. If the provider achieves predetermined outcomes, then government repays investors their principal plus a modest return. To date, there have been several projects launched in the US with different structures and investors and many more are in development.
Social Finance and Impact Investors
Our Social Investment and Active Performance Management teams provide focus throughout the full life cycle of their Pay for Success engagement to ensure the project stays on track and to regularly update investors. We work with a spectrum of investors and use different sources of capital to develop Pay for Success projects that meet the needs of different impact investors.
As an intermediary, at Social Finance we think carefully about structuring Pay for Success financings to appropriately manage the sources of risk involved in a project. Transferring performance risk from government to private investors is a core feature of the Pay for Success model. Social Finance typically coordinates with a financial institution to design an appropriate investment and assure the capital raise is successful. Throughout contract development, we manage termination and credit risk, building a solution that meets the needs of all project partners.