The Power of the Layer Cake in Impact Investing

Anyone still confused about what exactly the difference is (or not) between Pay for Success and the Social Impact Bond got their questions answers – and much, much more – during an engaging conversation on “Multi Sector Collaboration in Impact Investing” at the Social Impact Exchange Conference on Wednesday. Moderator Peter Berliner of the Mission Investors Exchange set the table, so to speak, for the conversation and noted the broad lens of the term “investor” for anyone (not just foundations). He provided the perfect introduction to a wonderful group of panelists representing diverse perspectives and experiences as impact investors including foundations, banks, government, and intermediaries. Each having experience as an investor individually – and in collaboration – spoke to the advantages (and challenges) of “combining forces” in investments.

But first the clarity! While often used interchangeably, George Overholser from Third Sector Capital Partners quickly explained (and I hope to do this justice) that Pay for Success (PFS) is the contract with the government for services to be provided, importantly facilitating a shift from a reimbursement model (government pays for services provided) to one where government pays for outcomes achieved (performance). The Social Impact Bond (SIB) is the complex structure of funding that supports the service providers for the period of the contract until the government ultimately repays.

Utilizing the state of Massachusetts and nonprofit ROCA as a case study, each panelist added their perspectives on these instruments, and highlighted the roles (and opportunities) for philanthropy and nonprofits in the emerging impact investing space.

Leverage– Susan Harper from Bank of America spoke succinctly about the opportunities for leverage and collaboration. As a lender to CDFIs, Susan highlighted how her team utilized a small grant as required loan loss reserve (rather than direct funding) to leverage 10x in SBA funding for CDFIs to utilize as loan capital, reaching a much larger number of small business than if provided directly.

Advocacy– Stewart Sarkozy-Banoczy, who recently departed from his role at HUD and is now Managing Director with Context Partners, consistently highlighted government perspectives and experiences. He also noted the powerful effect of people’s feedback while at HUD, and encouraged the audience to provide feedback to government — start the conversation, advocate for their involvement, and go to them with deal opportunities.

Keeping the Focus on Social Impact– Brinda Ganguly from the Rockefeller Foundation highlighted their role as convener and investor – and their critical role (as philanthropist) in keeping the focus on the social impact in the impact investment deals. George Overholser also spoke to the similarly critical role that philanthropists play in SIBs in keeping a dedicated focus on evaluation.

Taking Risks– Philanthropy can play a critical role in taking the heavier risks in structured impact investments (dubbed by Stewart as “layer cake” deals). Using the SIB as an example, by taking first loss positions, philanthropists help make a SIB safer for other investors. The goal is that as outcomes are achieved and the SIBs are successful, more private capital will reduce the need for philanthropic “cover.” Brinda Ganguly highlighted this progression, noting how investors in the first UK SIB were all foundations and now – with 14 SIBs active – more private capital is coming in to support these deals.

Echoing an emerging theme on the role(s) of philanthropy in scaling – in addition to providing direct funding (growth capital) to scale evidence-based solutions – perhaps philanthropy can also play a catalytic role in developing emerging impact investment vehicles (such as the SIB) that – if successful – could help unlock the interested-but-not-yet-invested private capital to join us in helping to scale what works!

Andrea E McGrath is an independent consultant, researcher and partner in Connecting Capital