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Reinvestment Fund just launched a new kind of ‘pay for success’ project

Project Welcome Home, a California pay for success project funded by Reinvestment Fund in 2015. June 15, 2017 Category: FeatureFeaturedFunding
A more efficient funding model is gaining traction in Philadelphia.

At the end of May, financier and policy research firm Reinvestment Fund announced its participation in a $10 million pay for success (PFS) fund that will specifically fund programming aimed at reducing inequalities in the areas of social services, health care, housing and education.

The Center City nonprofit is contributing $1 million to the pooled fund from its $288 million core loan fund, which is made up of funding from 850 impact investors for the purpose of supporting various mission-aligned investments, according to Kavita Vijayan, Reinvestment Fund’s director of strategic communications.

Other contributors include international insurance corporation QBE Insurance Group at $7 million and foundation collective Living Cities at $2 million. Reinvestment Fund is also managing and administering the PFS fund.

You may recall the big to-do made last year when Pennsylvania announced two PFS projects aimed at curbing recidivism rates in the state by scaling programs from nonprofits Center for Employment Opportunities and Youth Advocate Programs.

It’s a complicated and largely untested funding strategy that works like this:

  • A nonprofit or social enterprise is working to reduce some public sector issue (say, homelessness or recidivism) through a scalable program that’s already shown positive results.
  • Instead of the government paying that nonprofit to scale the program, investors (foundations, financial institutions, venture capitalists) agree to fund it.
  • In turn, the government only pays the investors (retroactively) for the program if it is, indeed, proven to be a success according to strict measures.
  • Here’s a gif we made of the process, just for fun.

But this pooled fund method is different from PFS projects that have come before it in that there is no specific project it’s funding — yet. Instead, Reinvestment Fund is actively looking for projects to fund within its policy scope of social services, health care, etc.

From our Partners

This new method also circumvents one of the biggest growing pains of PFS to date: Investors don’t speak “impact.” As we wrote last June:

Private sector investors want measurable outcomes. Quantifying social impact, conversely, is an unproven science. Therein lies the rub. Not knowing exactly what the results of your investment is not particularly appealing for venture capitalists and financial institutions, and it’s why traditionally risk-averse foundations have played vital roles in PFS deals to date.

These investors do speak impact, though, which is why Reinvestment Fund, QBE and Living Cities were willing to climb aboard — they’ve all funded PFS projects in the past. Reinvestment Fund has funded four, including one with QBE in Connecticut and one with Living Cities in Utah; Reinvestment Fund and Living Cities also co-wrote this blog series on best practices for PFS.

This type of fund saves time and money, too, said Andy Rachlin, Reinvestment Fund’s managing director of lending and investment. Investing separately means three underwriters, three review processes, three legal reviews. Investing together means one of each, thus increasing efficiency.

Investments made by the pooled fund won’t necessarily be local, Vijayan said, though Philadelphia “is our home base, and I’m sure if the opportunity arises, we’d definitely be open to considering it. But there’s no priority by location,” she said. Still, “our network is huge locally, and hopefully there might be an opportunity.”

Reinvestment Fund also hopes this pooled fund will serve as a model for other funding entities looking to jump into PFS.

“It’s still sort of nascent. It’s a growing field,” Vijayan said. “Our hope is the creation of the fund and these three partners coming together will create some sort of learning around how these things are done.”

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