Nonprofit Finance Fund (NFF), a longtime lender and advisor to the nonprofit sector, commits to bring investment capital, in the form of subordinated debt, to the market in 2014 and 2015 to support Pay for the Success transcations. The purpose of this capital is to help mitigate the risk to the investor if the service provider cannot meet the contracted impact benchmarks in a PFS transaction. By reducing the investors' potential loss, NFF's subordinated investment will help entice commercial, return-motivated lenders to participate in PFS deals and increase the amount and access to capital of strong provider organizations across the country. to attract return-oriented investors. Additionally, NFF's investment looks to incentivize philanthropic investment at the subordinated level, and these investors could 'shadow' NFF in the due diligence and underwriting process.
Specifically, NFF commits to investing up to .1 million in one to three PFS transaction in 2014 and 2015. NFF aims to leverage eight times this amount from philanthroipic and other investors also interested in investing subordinated debt to catalyze larger investment in PFS transactions. With a current pipeline of 10-20 deals across the country and the need of sub debt in transactions averaging ,000, NFF aims for a leverage of eight times to bring much of the needed million of sub debt to transactions.
NFF will explore various sectors for this investment, and expects the transactions to be in the health, youth and families, and/or homeless services space. It is these sectors where the current pipeline of deals is focused and adds diversity to current PFS deals. . NFF's role will be as the subordinated lender providing the necessary gap financing to bring the more commercial capital to the deal, and NFF will actively advocate with philanthropic investors, through an established PFS Funder Working Group, for their partnership and investment in these deals. NFF's current role as knowledge integrator in the PFS space ( and its connections to providers, local government and intermediaries working on PFS provides deep visibility into pipeline. The proposed PFS financing program is an extension of NFF's broader strategy to build the sustainability of the nonprofit human service sector.
Due diligence of existing PFS deal pipeline, including meetings with deal originators and intermediaries, as well as site visits and interviews.
Underwriting of transaction(s), including the presentation to and approval of the transactions by NFF's Credit Committee
Based on due diligence, selection of at least one or possibly two deals NFF will move into the underwriting process
Close a minimum of one transaction
Identify and/or confirm an additional one or two transactions, after completing the necessary due diligence and site visits
Conduct underwriting of the one to two deals and bring them to NFF's Credit Committee for approval.
Close the approved transactions
NFF will monitor the financial performance of the investment based on 1) baseline repayment of the loan, 2) interest payments received over the term and 3) success payments over the term of the loan based on achievement of the identified programmatic outcomes.
Nonprofits working to address problems such as prisoner recidivism, homelessness, workforce development, asthma, and diabetes have relied almost exclusively on grants and public contracts to provide their services. These sources are increasingly unreliable and are insufficient amounts and/or not appropriately structured to scale or adapt successful programs. A new model is being tested in the market-- Pay for Success (PFS). Through the PFS model, private investors provide capital to fund early intervention services that reduce social problems among low-income individuals and communities, thereby saving society and the government money over the long term. This model mobilizes private investors to provide upfront operating capital for prevention and early intervention programs. The investors are then repaid out of the cost savings realized as a result of effective service provision. To date, four PFS transactions have been funded and launched in the U.S. There is a growing pipeline of possible transactions, but the timeline for deal structuring and raising the capital is protracted. With little market precedent from which to build on, incentivizing and streamlining investor participation is difficult.
NFF seeks philanthropic investor partners interested in a subordinated role in PFS transactions. NFF would be interested in aggregating a pool of sub debt, and is available to provide due diligence and underwriting support to philanthropic investors who would like to learn about and target PFS transactions.
NFF will provide to partners visibility and insight into the PFS deal pipeline and will share what is learned through the due diligence process.