Underwriting Pay for Success Investments February 2 nd, 2016

Welcome

Current Portfolio Overview 3 Introductions LISC is a national nonprofit intermediary that provides financial and technical assistance to community-based organizations, public agencies and private nonprofit and for-profit entities focused on the redevelopment of urban neighborhoods and rural communities. The organization works through 30 local offices in urban sites and a national rural program which operates in 43 states. Presenters: Malini Nayar Nonprofit Finance Fund (NFF) unlocks the potential of mission-driven organizations through tailored investments, strategic advice and accessible insights. NFF's work in PFS has focused on helping service providers, investors, and governments understand and build readiness for productive participation in transactions tied to meaningful and measurable outcomes. Presenters: David Streim The Reinvestment Fund (TRF) is catalyst for change in low-income communities by integrating data, policy and strategic investments to improve the quality of life in low-income neighborhoods. TRF brings together individual investors, banks, government officials, private foundations and faith-based and community organizations to invest in projects that transform communities. Presenters: Andy Rachlin Third Sector leads governments, high-performing nonprofits, and private funders in building evidence-based initiatives that address society’s most persistent challenges. A nonprofit based in Boston and San Francisco, Third Sector is supported through philanthropic and government sources, including a grant from the federal Social Innovation Fund. Presenters: Rick Edwards and Laila Goldberg

Current Portfolio Overview 4 Agenda What is Pay for Success and how does it work? Understanding the PFS capital stack PFS Underwriting Framework Getting involved in PFS opportunities Q & A and other resources

What is Pay for Success and how does it work?

6 What is Pay For Success (PFS)? INDEPENDENT ASSESSOR determines if predetermined performance targets are met EVALUATION ADVISOR Rigorously measures outcomes to ensure providers achieve impact INTERMEDIARY raises capital from funders and identifies service providers SOCIAL ISSUE with historically poor outcomes such as recidivism, chronic homelessness, or early childhood education identified GOVERNMENT contracts with intermediary for delivery of preventive programs to address social issue PRIVATE FUNDERS provide upfront capital to intermediary to pay for social service provider to deliver preventive programs SERVICE PROVIDERS receive funding to deliver evidence- based intervention in effort to reach or exceed predetermined outcomes CONSTITUENTS receive services in an effort to reach or exceed predetermined outcomes for success; government repays private funders if project is successful in achieving positive outcomes 1

7 Key elements of a PFS project Net Financial and/or Social Benefit to Government Credible Data Service Providers with Capacity to Scale Significant Unmet Needs and Targetable Population Funder Feasibility Interventions that Work PFS Risk Mitigation / Appropriate Safeguards

How does the funding for PFS work?

9 The PFS Landscape New York State Recidivism / Workforce Development $13.5 mm Salt Lake County Early Childhood Education $6.0 mm County of Santa Clara Chronic Homelessness $6.9 mm Cuyahoga County Chronic Homelessness / Child Welfare $4.0 mm City of Chicago Early Childhood Education $16.9 mm New York City Recidivism $16.8 mm Massachusetts Recidivism $21.3 mm Massachusetts Homelessness $3.5 mm State level legislation and / or budget passed supporting PFS State level feasibility studies / pilot programs / study committees Federal Opportunities: CNCS Social Innovation Fund Pay for Success Grants Competition, HUD and DOJ NOFA, HR 1831, HR 1336, S 1089, FY16 $300 million “Incentive Fund,” S 2691, Senate Workforce Innovation Act, HR 4885

10 What are the opportunities to fund PFS Projects? Grants Senior Loans Junior Loans / PRIs Recoverable Grants Grants Sample activities: Assess stakeholder readiness Prioritize target population Design procurements for providers and other project parties FEASIBILITY AND TECHNICAL ASSISTANCE Sample activities: Develop intervention and evaluation plan Financial structuring Economic modeling Contract formation Project fundraising PROJECT CONSTRUCTION AND FINANCING Sample activities: Ramp-up and pilot Program implementation Project evaluation Project management PROJECT LAUNCH AND MANAGEMENT

11 The Cuyahoga Partnering For Family Success (Cuyahoga County, OH) $1.58 million in 1 st position financing −$1.58 mm The Reinvestment Fund $2.275 million in subordinate loans −$1.00 mm: The George Fund Foundation −$0.33 mm: Nonprofit Finance Fund −$0.75 mm: The Cleveland Foundation −$0.20 mm: The Sisters of Charity Foundation of Cleveland $0.15 million Recoverable Grant −$0.15 mm: The Sisters of Charity Foundation of Cleveland $4 million in Total Project Financing 100% of principal at risk: no backstop or credit enhancement Diverse funding base designed for future replicability Opportunity for grants to be recovered for future projects

Underwriting Framework

Current Portfolio Overview 13 Assessing Risk in Pay for Success Projects The 4Cs of Credit Character Collateral Capacity Capital The 4Ps of PFS Partnership Program Policy Process

14 Assessing Risk: Partnership Players Service Provider Government Evaluator Intermediary Funders Relevant Content Knowledge Organizational Credibility and Capability Partnership Capabilities Strategic Plan for Evaluation Mitigating Factors Key Questions Have the players worked together on previous projects? Does the organization have a demonstrated track record in coaching partner organizations to more effectively achieve impact? Can the organization translate data into actionable insights? Does the organization have demonstrated knowledge and experience with multiple assessment methods?

15 Assessing Risk: Program Players Service Provider Intervention Evaluator Connection with Target Community and Intervention Ability to Scale Operations Interest and Capacity to Undergo Rigorous Evaluation Funding and Financial Management Mitigating Factors Key Questions Does the service provider have significant experience with beneficiaries? Can the impact delivered by this intervention be clearly measured? Does the intervention have a long track record of results?

16 Assessing Risk: Policy Player Government Leadership and Capacity Partnership Capabilities Data and Accounting Capabilities Appropriations Mitigating Factors Key Questions Is there a demonstrated commitment to paying for results? Do the parties involved have demonstrated experience with evaluating performance-based government contracts?

17 Assessing Risk: Process Players Project Manager Service Provider Government Evaluator Independent Assessor Intermediary Leadership, Board, and Staff Interest and Capacity Strategic plan for PFS implementation Operational Planning, Performance Tracking and Innovation Communication and Marketing Capabilities Risk Management and Infrastructure Capabilities Mitigating Factors Key Questions Can the organizations effectively collect and analyze data? Are there mechanisms in place to ensure repayment to the investors over the multi-year life of a transaction? Have the organizations demonstrated an ability to manage to outcomes? Do the organizations have the capacity to scale operations? Do the organizations have a demonstrated track record in raising capital for new ventures?

18 Putting it All Together Do the partners have the ability to be flexible, to accommodate new learning, changing circumstances, and each other? Have the partners worked together before? Is there clear passion for the work and faith in the proposed project? Passion Compatibility Flexibility Alignment Are the partners clearly aligned on the goals, methods, and processes to be used to do the work? Do they articulate these things with a shared vocabulary? At the organizational level, are cultures compatible? Do the leaders and staffs of the organizations evidence shared values? At the individual level, do the key players get along?

Opportunities to get involved in PFS

20 New PFS opportunities in 2016 Government Issue Area Intervention Target Population Budget State of IllinoisJustice, Child Welfare Provide youth with intensive wraparound services and treatment 800 youth between 11 – 17 years old $15 million State of ConnecticutHealth, Child Welfare Mental health services, workforce readiness trainings, wraparound services 4,500 at-risk and underserved mothers $10-14 million New York StateJustice Placed-based supports and services, care management and crisis support 500 high-risk youth$12 million Salt Lake County Housing Assistance to overcome housing barriers, case management and employment services, behavioral health services ~200 individuals spending 3-11 months in emergency shelter $12-15 million Justice Intensive REACH model, therapy, housing and employment resources ~200 high-risk, high- need offenders recently released from county jail Santa Clara CountyHealth Improved coordination of care for acute mental health patients 250 severely mentally ill adults TBD State of Oregon Youth Development, Justice Comprehensive, in-home service delivery as an alternative/diversion from out-of-home placement 350 at-risk youth, aged 10-18, involved in juvenile justice system $10 million Youth Development, Education Friends of the Children: One-on-one mentorship programs, following young students through graduation 200 at-risk youth, aged 5 years old $10 million

Q & A

Additional Resources 22 Nonprofit Finance Fund’s Pay for Success Learning Hub The Reinvestment Fund Third Sector Capital Partners Living Cities Corporation for National and Community Service LISC

Contact Information 23 Malini Nayar David Streim Andy Rachlin Rick Edwards Laila Goldberg