Federal Reserve Bank of San Francisco

Community Development

Pay for Success: Understanding the Risk Trade-offs

Author(s): Kristin Giantris and Bill Pinakiewicz, Nonprofit Finance Fund

April 2013

Community Development Investment Review

Pay for Success (PFS) financing is a relatively new concept in the United States, with great potential for improving the social sector and government efficiency. As with anything new and disruptive, there are numerous unknowns for the pioneers forging the early path. Early excitement about the first social impact bond in the United Kingdom (Peterborough prison pilot) was quickly followed by the question, How will this work in the United States, and what are the risks? When new financial markets emerge, it is common to see wide variation in the proposed mechanisms for addressing risk, reflecting the different perspectives and risk tolerances of the participants involved. Only by understanding, quantifying, and managing this risk will investors become comfortable enough to invest in PFS financing structures.

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