Mesenchymal stem cell (MSC) therapies demonstrate particular promise in ameliorating diseases of immune dysregulation but are hampered by short in vivo cell persistence and inconsistencies in phenotype. Here, we demonstrate that biomaterial encapsulation into alginate using a microfluidic device could substantially increase in vivo MSC persistence after intravenous (i.v.) injection. A combination of cell cluster formation and subsequent cross-linking with polylysine led to an increase in injected MSC half-life by more than an order of magnitude. These modifications extended persistence even in the presence of innate and adaptive immunity-mediated clearance. Licensing of encapsulated MSCs with inflammatory cytokine pretransplantation increased expression of immunomodulatory-associated genes, and licensed encapsulates promoted repopulation of recipient blood and bone marrow with allogeneic donor cells after sublethal irradiation by a ∼2-fold increase. The ability of microgel encapsulation to sustain MSC survival and increase overall immunomodulatory capacity may be applicable for improving MSC therapies in general.