In Massachusetts, Investors are Betting on Immigrants

A new pay-for-success bond being pioneered in New England helps immigrants obtain better employment opportunities.


For immigrants moving to the United States, especially those for whom English is not their first language, one of the greatest challenges is finding a good job. At the same time, many employers are desperate to find skilled workers to fill certain jobs, including math tutors and heath care workers. Now one state is seeking to close the gap between skills and opportunities for its immigrant community — and it’s turning to the capital markets for assistance.

In June Massachusetts Governor Charles Baker’s administration announced a new initiative, the Pathways to Economic Advancement Project, a public-private partnership aimed at improving employment opportunities for limited English speakers and helping them boost their employment prospects. The program, a joint venture between the Commonwealth of Massachusetts and two Boston-based not-for-profit partners, Jewish Vocation Services (JVS) and Social Finance, is backed by $12.43 million in equity capital.

Under the pay-for-success model, investors get paid back based on the fulfillment of certain desired outcomes, such as the number of people who complete certain programs or find jobs. The transaction allows the borrower, typically some type of government entity, to get money up front for particular initiatives — an especially attractive proposition in a budget-cutting environment.

A total of 40 investors came into the deal, including Prudential Financial, marking the firm’s first pay-for-success investment.

“We are very excited about this pioneering Pay for Success project, which leverages private capital to advance economic mobility for immigrants,” says Tracy Palandjian, Social Finance co-founder and CEO. “With this transaction, we build on the core values of our country -- providing pathways for individuals to pursue their own American dreams.”

Social Finance was responsible for bringing together the various parties — investors, government, not-for-profit partners and other stake holders — to facilitate the transaction, which is the first to target immigrant communities.

Social impact bonds, instruments using investment capital to secure desirable social outcomes that typically reduce costs to government, have been around for more than a decade. The market, however, is still in its infancy and has been relatively slow to scale. Experts cite the early nature of the marketplace, which is still in the experimental stage, as well as the bespoke, complex, nature of each transaction as reasons for the slow takeoff. The risks in these deals are that the projects do not deliver on the outcomes that they have promised, in which case the note holders may not get paid back.

Participants in this latest deal, however, are hoping that it will prove a model for success that can be more easily and rapidly replicated, finally giving social impact bonds the traction they need to achieve broader adoption both by sponsors and investors.

As of March 2016, ten pay-for-successs projects had been launched in the U.S., according to data complied by the Nonprofit Finance Fund, all of which have incorporated some form of social finance bond. The Pathways to Economic Advancement Project is among a handful to have launched this year. There are now 17 such initiatives in the U.S. and Nonprofit Finance estimates as many as 50 are in development.

Newark, New Jersey-based Prudential has $1 billion dedicated to so-called impact investing — or those investments that are expected to have a measurable social or environmental outcome as well as produce a financial return — of which $600 million is currently invested. The group has not invested in pay-for-success programs in the past, in part because of the nature of some of the earlier transactions. Either the deals were backed by one high-net-worth individual, meaning that they were not a true market-facing transaction, or the link between investment and outcome was less clear.

Many of the most high-profile social-impact bonds to date have focused on recidivism, implementing programs to help reduce the likelihood of people released from prison reoffending and returning to jail. But while the economic benefits to states and municipalities of reducing recidivism are significant — it costs money to keep people in jail — what goes into successfully keeping someone out of prison is a complex mix of factors.

By contrast, the goals of Massachusetts’ new program are relatively straightforward. Over the next three years, the state plans to assist approximately 2,000 adults in the greater Boston area by providing them with vocational English-language classes, integrated with job search assistance and coaching, with the aim of getting these limited English speakers — especially documented immigrants and refugees — into higher-wage jobs and higher education programs.

A large community based provider of adult education and workforce development programs, JVS will be providing the education and training services, offering four different program tracks depending on people’s skills and goals.

“This particular project is deeply compelling to us,” says Ommeed Sathe, head of impact investment at Prudential Financial. “How do you solve for one of the biggest issues in the economy right now? You have very low unemployment but you have got substantial population that are under employed.”

In the past, at least one program fell down because the service provider lacked the necessary experience or expertise. In this instance, Sathe says Prudential did its homework.

“In doing this investment, we really spent time making sure and getting comfortable that JVS is going to be able to deliver these outcomes,” Sathe says.