 I'm Andy Phillips co-founder and managing partner of Make Home Capital and it is really lovely to see you all, some folks that I know, but also some new faces. I'm here today with Dr. Candace Thomas who has been a partner to Make Home in a great project which is what we're going to spend most of our time talking about today, which is a pre-K project in Memphis, Tennessee and Shelby County, Tennessee which sort of overlaps but not completely and is a really exciting example of how outcomes financing was used in that context to really drive really, really strong financial and impact performance for the project. I do want to do a little table setting first, so how many people here know what a social impact bond is, pay for success or outcomes financing? Wow, fantastic. How many people were at SoCAP in either 2012 or 2013 when it felt like all anybody wanted to talk about were social impact bonds? So I was here. So just sort of turning back time a little bit to give context, the idea of the social impact bond and I do air quotes because they're not bonds and I was, my line was always that they were social impact not a bonds. Anyway, at about that time was when that was social impact bonds and pay for success was a very, very new idea and it emerged out of the UK where the incredible, brilliant, indomitable Sirani Cohen had this idea that we could think about impact investing as a tool to drive better outcomes in communities and that fundamentally what we're going to do was partner with government and use private capital as it has been used historically to build bridges and tunnels and airports and public-private partnerships but instead to drive better outcomes for health and human services. If you take a step back and think about it, government is the largest purchaser of services for people who are poor and disadvantaged to the tune of 800 billion to a trillion dollars a year. If any of you have ever heard me speak or some fellow travelers, we all talk about how there was at a given moment deep consensus among Republicans and Democrats that only 1% of that spend was based on evidence. The core of the idea of what we now call outcomes financing was basically to disrupt government funding and business as usual. The way I think about it is when government funds those programs for people who are poor and disadvantaged, you essentially are creating a market failure because the person who is buying the government is not the person that is then using those services or the customer. What you end up with is no feedback from the customers into the system in terms of how those services are performing. Pre-K is a great example. If you're a private pre-K targeting private pay families and you're not providing really strong services, do you know what? Nobody enrolls in your program because they're not going to pay for it. When government is funding those programs, folks don't have the same level of choice if that's what they need. What we're going to do today is really talk about social impact bonds 10 years later, but really doing it through the lens of this particular project in Memphis. I've been coming to SoCAP for a long time. It is a hotbed of ideas and the next big thing. As I said 10 years ago, social impact bonds were the next big thing, which is really, really fun in real life. Any new investment strategy takes a lot of hard work and you have to move beyond the next big thing of it. What we want to do today is something a little bit different in this context, which is actually to talk about a real life investment, to talk about the impact performance and to talk about the financial performance because if I think about building new markets and leveraging impact investing dollars, to me it is a very bottom-up process. What I want to know is how is impact capital driving real impact in communities and that the way we are going to build these markets and get to scale is in some sense one deal at a time. Today we are going to talk about one deal. As I said, I have the fabulous Dr. Candace Thomas here who is the heart, soul and wisdom behind this Pre-K project. It has been amazing to work with her over the last three years and together in partnership be able to provide Pre-K to 3,000 low-income four-year-olds in Memphis. I think when we started working together it was April 2020 and if you ever thought that Candace was not fierce she up and moved to Memphis a month into COVID to lead this effort and if you had asked me would we be successful delivering Pre-K during a global pandemic? I would have been a little bit worried but the exciting news is we were able to do it. So I am now going to sort of turn it to Candace and say and really start with sort of a big picture question which is why Pre-K? Why is this where you focus but also why is this where Memphis and Shelby County focused? Good morning everyone. Thank you for coming. Move over so we can see your face and you can see ours. I'm a New Yorker so Andy and I were just talking and we're talking about how in Memphis things move a little slower and I like things to move a little faster and I have a lot of head nods and a lot of gestures so you're going to see a lot of that and in Memphis I have to do a lot of like cultural attuning like okay slow down oh they're going to say you're aggressive so it's so interesting for me. I'm constantly like thinking about cultural context and landscapes. So I am a developmental scientist so I study child development. I've been focused on children starting prenatally for 16 years now and so Pre-K is a no brainer for someone like me knowing that children are literally born learning and we can argue that children in utero are learning. And so our system starting at birth really is a hodgepodge of many different things but Pre-K in this country has really been a fast moving train really since the 1970s when some of the first Pre-K and pre-school research projects occurred mostly in Michigan and North Carolina and so it's really a no brainer. We know we need to invest in young kids education. We know that parents and families and caregivers want to send their children to a place where they're having lots of fun and where they're learning a lot. In Memphis and in Tennessee every state is different. Tennessee is a voluntary Pre-K state so you don't have to send your child to school until they're five but we know that the higher quality environment for a young child and high quality means a loving nurturing caregiver who's going to talk to them all day and make sure they get their naps right? Much more complicated than that but high quality making sure that children are with people who really care about them and who are going to let them explore and have fun. And so in Tennessee given that Pre-K is voluntary we saw a vast variety of different quality of programs and services and while there were state investments only less than 20% of people who were eligible for Pre-K so income eligible were attending. So during the Obama Administration there was a huge push around the country for a preschool development block grant it's actually, it's been several iterations since and it's up for renewal now and so Memphis which is in west Tennessee and the county shall be applied and the community had about a thousand more Pre-K seats and then they did not get the grant the second go round. So then Memphis and Shelby County were going to lose all of those Pre-K seats and my colleagues were really having a hard time figuring out how do we convince local government that not only can we not lose these seats we need way more Pre-K seats in the community and so the story is that our local government said well we're not going to just pay for this to pay for it so our colleague in Memphis Mark Sturgis said well you're not going to pay for this to pay for it you'll pay for outcomes. Now if I were in the picture at that point I probably would have argued there's been research for the past 30 years proving that Pre-K works especially for kids who look just like the kids in Memphis so why are we doing this? But it convinced our local government and so we started a three years outcomes financing program for Pre-K and our community and it made Memphis the city of Memphis and our local county the only city and county in Tennessee with universal needs based Pre-K for every child who needs it. Great, thank you. And so at about the time when they were about to lose the Pre-K seats was when our team at Maycom met the folks down in Memphis and began working together around the outcomes financing project together what we came up with was what were the key outcomes that folks really cared about and where we started was consistent attendance there's a tremendous amount of research that shows that consistent attendance has correlated with long term academic success as Candace points out Pre-K is voluntary but the idea was if you could get families to build that consistent attendance muscle early on that that would ultimately lead to a better attendance track record in this the second two metrics were really tied to data that was already being collected in the community so they were already using a Pre-K literacy skills assessment tool that was a standardized assessment tool so we use that and then the third metric was around kindergarten readiness so all kids in Shelby County schools get assessed based on a normed test at the beginning of the year around kindergarten readiness and that was our third metric we launched the project in the fall of 2019 things were going incredibly well really strong consistent attendance really strong enrollment which isn't always a given when it's a voluntary program and then it was March 2020 and COVID hit and we all had to collectively manage through that so I think Candace I'm going to turn it to you and sort of hear a little from your perspective in terms of what was going on on the ground when you arrived in Memphis so you can imagine March of 2020 right we all had this collective experience of hold on what is happening many of us had to stay home and had the privilege of staying home because you know not every single worker in our economy could have stayed home and so you had a bunch of young kids at home and obviously older children as well so what a complete flip at that time every single one of our classrooms went virtual the end of the school year that school year and most of our classrooms actually 100% were virtual the next school year until about April of 2021 and so as Andy said we were tracking attendance and enrollment and kindergarten readiness and then you were like wait a minute these babies these four-year-olds had to zoom into school or virtually connect to school how do we do that in the presence of someone older an older child a cousin an adult or a caregiver so then we said oh we need to start tracking how often do teachers actually are live zooming with their four-year-old classrooms so then we started tracking synchronous learning and then we really thought what's most important here is not about our not about their kindergarten readiness and those scores how do we make sure families the families that need it most have additional support so we really started to track wrap-around services making sure that there was a family engagement worker or someone really touching base with every single family in our program so that was a huge game changer and then we obviously started tracking some social emotional developmental goals or just wanted to see where kids were because you know if you ask people to collect the data then they actually have to do it and so we had to start asking them to collect certain data so that we really understood where kids were and I think what I would posit is that the structure of outcomes financing where dollars were going to flow based on actually achieving outcomes provided a framework in scaffolding for the partners to over the summer of I guess it was 2020 really come together across us as the private investors the folks at first aid the providers the folks in government and say okay the unheard of has happened we are now faced as Candace said with teaching four-year-olds virtually what are we going to hold ourselves accountable in terms of delivering to these kids and I don't know if any of you guys had kids in school during covid I had a high school student and I'd go in his room at 11 in the morning and he'd be in bed asleep and I'd be like what's going on and he'd roll over and say asynchronous and it was never planned it was impossible to know if that was true or not well you can't do that you could manage it if you were in high school but not if you're four years old and not if you're a mom or a dad home with a four-year-old and so I think what we saw in terms of the collaboration on the ground was how do we come together and agree on what are the standards we're going to hold ourselves to and I think one of the leaps forward was it forced us to think really about what are the building blocks that we know we need to deliver to these family and hold ourselves accountable to and ultimately continue to track pre-k literacy skills and kindergarten readiness and so from our perspective and I as I said have been doing this work a really long time I think it helped me sort of it helped solidify for me the thesis that the structure of outcomes financing actually does lead to better outcomes which then I'm going to pivot to Candice and let her talk about sort of what we found out and where we ended up during very very trying times yeah and I would say again like having this structure in place really forced us to do a really good job of keeping track of our assessments and our outcomes and then obviously from this project this project involved both the city of Memphis or the city council and the local county commission and so we were also then reporting out and today actually my colleague had a presentation in front of the city council reporting quarterly to the city council in the county commission about what was happening so we had all of these structures in place to make sure that we were holding ourselves accountable as much as we were holding every single teacher and family service family engagement person accountable to the work you know everyone is incredible and through this global pandemic but we got to celebrate the four-year-olds and especially those four-year-olds in Memphis we saw that our four-year-olds who were we ensured that they intentionally received wraparound services and sometimes we think this was the secret sauce about our program that they had really strong pre-K reading skills during that COVID year and there was some data that also indicated that they were ready for kindergarten when they got to kindergarten the next year the data is a little bit wonky because if you remember September of 2020 everyone's at home and so we had to like have families reassess because we think the first assessment that we had some parents or older siblings taking some tests for our four-year-olds so when they got back into the classroom in April we had unfortunately it's never good to over assess any of us but especially kids we did some additional assessments to really see where they were and we had some really strong kindergarten readiness outcomes and after in September 2021 that data was consistent so 45% children in our pre-K program which is a subset about 20% of Memphis's pre-K students overall were kindergarten ready that is huge Andy always compares that to Kentucky data yes so I don't get our friends in Tennessee angry with us but if you look at this similar population data for low-income kids in Kentucky it's 35% and that's pretty consistent that typically in low-income communities 30 to 35% of kids are entering kindergarten kindergarten ready 45% of our kids were there without getting into the statistics of it you would expect on a population basis to have 50% of kids being kindergarten ready because it's a norm test what that means is we were able to significantly close the achievement gap for kids coming in and again like I want to take a moment on that during COVID and so when we think about sort of impact investing and where are dollars going I think one of the exciting things about the structure of our investments is that there is not a tradeoff between financial return and impact those things move together this investment from a financial perspective performed as we expected it to and from an impact perspective it performed I think what I would say is better than we anticipated it would because I don't, while we expect it to begin to close the achievement gap I don't think we expect it to get this far and what I would say is I think it isn't really a testament to the amazing folks on the ground but I also think this structure of outcomes financing is really part of that story because it creates the infrastructure needed for us to be successful yeah so how do you see this work continuing so you just said that folks are now continuing to report on outcomes to the city and county council is the notion here that this is now a muscle that's been built in Memphis and Shelby County that will continue to hold folks accountable for those outcomes absolutely so we're continuing the work and we'll continue to partner with Make Home and our other stakeholders in one way or another but we're just seeing it instead of outcomes financing a performance based pre-K program so we want to, this was really late the groundwork for us to put in the infrastructure needed to collect the data and so we are continuing with that we're continuing to collect all the data that we did over the last three years through outcomes financing continuing to report out to our local stakeholders because we want, we know with the data that that may, that'll help improve our programs parents will understand better what they can expect from their young high quality pre-K experience what their young child can be learning and so this is going to continue just without the outcomes financing arm of it and that's really the idea is that this is a way of pivoting what's happening on the ground I'm going to pause here and open up for questions because I think these are always more interesting if we can have a dialogue so any questions and so you're asking about how did the children in our program actually connect okay so remember that time of our lives and just trying to figure out how do we ensure in a mostly low income working class community and city that four year olds would have access the technology companies came with an amazing commitment to ensuring that everyone had access so it didn't, we don't have a broadband which I think we need but we did ensure that with Verizon and AT&T we actually applied for a grant with the state of Tennessee the technology companies worked with the state of Tennessee and so first state Memphis and our local school district which is the largest school district in Tennessee applied for a grant and we actually got hotspots for every single family and or if the family needed a tablet or a computer so as you may know there are like tablets on the market that were, that you literally can just use to get into school so we got all of those grants in the community and that is how a literal labor of love getting thousands of hotspots and tablets across Memphis during the height of COVID but it happened one of the things we also talked a lot about was for all of these families that might otherwise not have been connected to some of the systems that would help them the wraparound support providers and first state became really critical lifelines in terms of making sure someone was checking in with families getting them access to these resources and you're teamed in an amazing job on the ground when everybody was living life disrupted so really incredible Memphis really benefits from a very strong organization on the ground called Seeding Success that is focused on better outcomes cradle to career for people living in Memphis Memphis has I think the second highest child poverty rate in the country and the team at Seeding Success were really the lead on building support with the city and county to get them on board as context that I think is also really interesting in this project cities and counties don't often collaborate in the US and so it is really innovative and speaks well of the partnerships on the ground that they were able to leverage and pool funding from both the city and the county on a technical basis they passed a joint ordinance that put in place the commitment and then they each passed their own budget and then contracted jointly and which really was really kudos to them that they were willing to collaborate in that way you know you should add to this but I think that part of again this structure of outcomes financing meant everybody was already at the table we were already holding quarterly project meetings on a quarterly basis the team on the ground was already reporting to the city council and the county council and so when COVID hit those relationships existed and they were then part of the conversation yeah and something like this and with a lot of other projects requires ongoing relationship building and leadership changes so we just got for instance a new director of education at the county level and so now we need to bring this person up to speed and constantly in front of him so that he understands where we've been and where we're trying to go so there's been lots of ongoing relationship building with the city and the county and also just when you're in the city government you're running a gazillion and fifteen projects and so constantly not only annually getting in front of both chiefs of staff and maybe CAOs I'm forgetting administrative officer thank you I was like cannot think what a CAO is at the moment but on both sides and bringing them together and reminding them where we've been what does our data look like and how we need their ongoing support and why it's so important at this point people should not vote against the babies so we just were up for renewal for our three year contract and there was and there is still some rhetoric in Tennessee around children should be at home with their mothers until they're five and so we're still needing to do a lot of advocacy and educating around childcare the needs of young families with young children etc so it is just it really is ongoing boots to the ground that both I have to do some members of my team but also our local early childhood policy and advocacy folks just to walk through how the investment is structured thank you for asking Jay we at maycomb provide the upfront capital to first aid in the form of a loan with some unique features which I'll talk about in a minute so we lend them the money to actually deliver the services the repayment for the loan comes based on the contract with the city and the county that are tied to the outcomes that we've been talking about our investment is a pretty vanilla sort of term loan where we fund in multiple tranches because we want our capital to be efficient for the project the unique feature is that we do share in the risk of project success so that if the project falls short of the outcomes we would then take that loss rather than first aid and so again it's not unlike investing in building LaGuardia airport in our home city of New York or my now home city your former home city where investors have put up the initial capital and they'll get repaid over time as that airport is in use we hold ourselves to a little bit higher of a standard we have to hit the outcomes rather than just be in use and there are still questions about whether or not LaGuardia airport will provide high quality service if anybody's flown through New York it does look better so philosophically I actually really struggled with it when I learned about it right because of what you just said that I'm putting a dollar value on how much a child is learning a four year old is learning in pre-k knowing that especially that children learn best in the context of really strong relationships and then also the fact that this was a financing model that was coming from the outside knowing how important it is how much Memphis focuses on and as an outsider I know about folks who are from there people who are investing who understand the cultural context of Memphis as a community historically and present day and also the fact that in the United States we constantly over research and over assess especially black and brown communities so all of those things I struggled with mightily as I and I still struggle with all of those things I do know however that there are all of that context does play into the fact that the city and the county was not able to and did not allocate funding for education for pre-k education until this effort right so we know all the context also right I hope and we didn't say yet but I don't know if it's clear that Memphis is 5% black black American some folks from across the diaspora but mostly black American in a city that was founded because it was like this incredible location for the American slave trade right so I think it's incredible to live in a mostly black community I've never done so my whole life so to me it's incredible but all of that context comes into play here and we also we live in this society we have to strategize and figure out what's going to make the most sense and it made a lot of sense for our colleagues to say okay there are many reasons why you're not investing in pre-k we have another innovative strategy and if this is what is going to be to convince you then we're going to do it so I'll still struggle with some of the philosophical approaches to all of this especially in the context of Memphis but we also know the reality in which we live and if this is what it took and our city and county government said okay we want to partner with Maycom and our local funders and we want to see outcomes and this is what it was going to take for them to do it then let's get it done so I think I would just add a couple of things to that it is something that we're very very aware of and I think we try and manage that tension by building strong relationships on the ground predating Candice I spent a lot of time with the founding board of First Aid which is it has some interesting folks on it the chair is a leading business woman in Memphis who I think has been really helpful along the way of helping be a bridge person as well as another board member who ran procurement for FedEx so she had her smart government procurement hat on and really also was a helpful advocate early on in terms of helping again be folks who are a bridge another strategy that we use is to typically find a local co-investor and that's really somebody who is of the community and who can be a voice in all the conversations that is aligned with us from an investment perspective but really understands the community and that I think was has always been really invaluable local philanthropy came in and we provided the lion's share of the capital but they provided some of that and so I think that is something that helped I think we also tried really hard to stay in their lane and it's funny when we've done these deals in other places people will say to us well do you decide on the outcomes and what we always say is no you decide on the outcomes we're not coming in and saying use this assessment tool this is the right thing to track but instead it's looking to what's already being done because those are value decisions that communities are making and particularly when it comes to assessment assessments like the academic community and early childhood they would kill each other over choosing different assessment tools and there is no answer we believe the answer is whatever local folks have decided to use so wrap around Andy right it was built into the program so that was that was built into the program as they were starting it and that's not really the early childhood if you know anything about Head Start Head Start is federal pre-K essentially you can characterize it that way and wrap around is a key part of that so we they were in person wrap around and then the height of COVID we were virtual wrap around and so that stayed consistent but you know it was hard for every single one of us to adjust to a virtual environment people were doing a little door-to-door canvassing in a low-end community there is a lot of there's a lot of instability around housing and in Memphis transportation so there was a lot of just rethinking how do we how do we make sure that we're accessing families and getting them what they need so there was a lot of figuring out where families are and especially as the economic situation was changing like where people were moving to so there was just a ton of activity on the ground and actually no we actually saw some savings you can call it savings we actually call it unused funds right so we saw folks were using less money in their budget during the height of the year and a half of COVID when people are mostly at home because there weren't you know we weren't going to have conferences we weren't taking schools weren't taking field trips etc so we actually we didn't have to adjust our budget for some of the other needs we actually saw that our programs were using less and less and I think importantly my recollection is you were able to then invest that money where it made sense in terms of some focus on social emotional learning and professional development right so thank you Andy so we used some of what we didn't spend in the year prior we actually instituted a better assessment in my opinion that not only assess kids reading skills but assess them across all developmental domains so how were they social emotionally where were they physically in their growth right because we can tell what that something is happening with the child based on their how they're growing and what stocks they were meeting and so we if you're familiar with this we instituted Brighants which is an assessment tool that assesses kids through observation so that means you have to be paying attention to them across seven developmental domains but to train and lift 80 classrooms in Brighants on our end and then our all of our pre-k classrooms in the community in Memphis was a big lift so we were able to reinvest those funds into other things and what I would say is the advantage of outcomes financing because it's unlike a cost reimbursement contract which is way government contracts typically work there was flexibility in terms of redeploying the resources in a way that we're going to continue to drive strong outcomes rather than oh we're just going to give that back to the city and the county and that's such a strong point with government investment so we were able to uphold that in our next contract with the city and county so it's not reimbursement it's we get paid upfront and then we quarterly report out on where we are with the funding and if we have unused funds how we're going to reinvest that back into the community so that was a really strong model for us to uphold so it is a really interesting question and having been involved in this work early on which in most cases really grew out of the first projects were all in the criminal justice system where everybody loved the argument of don't put someone in prison for a year where it costs $200,000 spend $x thousand dollars to keep them out of jail and that was like catnip right that idea everybody loved it and it's interesting what has happened in the U.S. there's a person who's here today if you can find him Ben McAdams who was really one of the first movers headed up county government in Salt Lake County and I think he said it best which was government should not be in the business of saving money we should hold ourselves accountable to improving people's lives and our community and that really clicked for me and so we at make home have really tried to move away from the cost savings argument and really focus on value I think it also from our perspective has felt reductive and is not something we're we want to do we want to talk about how it is worth investing in pre-k because that is the building block of a strong Memphis which has a skilled workforce and that's why you do it and it's the right thing to do for these kids or when we talk about employment and training programs that is what that is good smart economic development because you're creating a talent pipeline for businesses coming in so we've really tried to move away from that argument though it's hard and I think particularly in the US context when you end up in very red states because I think that is something that resonates but we've tried to move away from it and we've also tried to move away from the first investment I made when I was at Goldman Sachs doing this work early on was in a criminal justice project and it was all about you know cost savings and so it was about reducing recidivism and like shrinking the jail population and that is an incredibly negative metric right and so we've also tried to hold ourselves accountable to positive metrics right let's talk about what happened to those young people who were in jail when they left as a result of what they were doing rather than just saying oh we've saved the system money but it's hard we live in a political world and people have political beliefs what we've also tried to get away from though that I think is very important is early on in the US there was probably 6 to 12 months taken before any project was started trying to calculate to the penny the potential cost savings and we've really moved away from that because in real life government is going to put aside an amount of money and it's never you know let's talk about pre-k someone Jim Heckman won a Nobel Prize saying that there is a 7 to 1 payoff in the US for investing in early childhood I can assure you we did not earn a 7x return and the county and city were not going to pay us that so given that I think you're right in the background folks are doing a cost benefit analysis but let's not waste time on the resources and most importantly a year of not delivering pre-k to at risk or kids who need it calculating to the penny what the cost savings are so I think we are over time so with that thank you everybody for your interest thank you Candace for making the trek out here and being an amazing partner