Risky Business – Philanthropy’s Role in Catalyzing Multi-Sector Investment Efforts

Andrea M. Ducas, Robert Wood Johnson Foundation
Posted: June 20, 2013

One theme that rang out loud and clear at this year’s Social Impact Exchange Conference is that philanthropists are in the business of taking risks and making bets. I know this to be true through my work at the Robert Wood Johnson Foundation, and indeed, it’s one of the reasons I enjoy my job so much. As a sector, we have fewer restrictions on how we invest funds, and therefore have incredible potential to identify, partner with, and lift up disruptive innovators working to achieve social change.

Wednesday’s session on “Multi-Sector Collaboration in Impact Investing” highlighted philanthropy’s rather unique role in risk-taking in developing and executing social impact bonds (SIBs) and pay-for-success programs. In a typical SIB/pay-for-success arrangement, a government agency agrees to pay for a service delivered by a nonprofit entity—but only after a specific set of social improvement outcomes has been achieved (the pay-for-success component). In order to provide the nonprofit with the capital to undertake the activity, an investor or set of investors makes a "loan" (social impact bond) to the organization and in so doing makes a bet on the organization’s success. The goal, of course, is for the nonprofit to be successful – in which case the loan is paid back to the investor(s) through funds from the government agency (the ultimate payer), and the government realizes savings through improved social outcomes, which in theory are then reinvested into society.

While social impact bonds are not without criticism, they are certainly an innovative way of attracting more private sector dollars to social improvement efforts, and as the panel suggested, there is no denying philanthropy’s role in helping to get this type of giving innovation off the ground. Rockefeller Foundation got out in front, helping set up the world’s first social impact bond in the United Kingdom, investing its own dollars in the arrangement and attracting other investors. Last year, in New York City, Goldman Sachs announced a $10 million investment in incarceration recidivism reduction—backed by a substantial loan guarantee from Bloomberg Philanthropies to minimize Goldman’s risk and make the investment more attractive.

And during the panel, Lili Elkins of Roca described philanthropy’s role in enabling her organization to take on personal risk in their pay-for-success arrangement with the state of Massachusetts. Roca wanted some skin in the game, so they went to some of their funders: in exchange for a slightly larger grant to Roca, the organization was able to raise enough funds to make its own small bet on its success. If Roca achieves the outcomes it aims to, that grant money will deliver an ROI that can then be reinvested in the organization.

Of course, the panel was also a wonderful opportunity to hear from the types of multi-sector partners that are working together to push the envelope on creative financing scenarios: foundations, banks, government agencies, accelerators, and nonprofits. I found it to be a nice look into the mechanics and relationship-building required to bring multiple parties with different motivations and bottom lines together around a common social problem. And the conversation highlighted philanthropy’s distinct role in helping to absorb various levels of risk to both spark initial interest in the concept and help catalyze progress.

With my background, I can’t help but think what an especially high-impact pay-for-success/SIB arrangement might look like with the end goal of improving the quality and value of health care—but maybe that’s the next frontier!

Andrea M. Ducas is a health care group program associate at the Robert Wood Johnson Foundation. She is a member of the Foundation’s Quality/Equality team. Follow her on twitter @andreaducas.