Program-Related Investment
A PRI is an investment (e.g. loan, equity investment, or financial guaranty) made by a foundation to pursue its charitable mission rather than to generate income. The recipient can be a nonprofit organization or a for-profit enterprise. Created by the Ford Foundation as part of the Tax Reform Act of 1969, PRIs are treated similarly to grants in the US tax code.
Program-Related Investments vs. grants from foundations
PRI differs from Foundation grants, which are given directly to not-for-profits to serve a public benefit. PRIs enable foundations to invest in companies or to invest in capital structures that help not-for-profits achieve larger-scale program outcomes.
Foundations may consider PRI to be a form of patient capital which means they do not expect the market-rate returns that they seek in their ordinary endowment investments. Unlike non-recoverable grants, if PRIs make returns they can be recycled back into the foundation’s endowment to make new investments.
Program-Related Investment vs. socially responsible investment
SRI or Socially Responsible Investments adhere to good Environmental, Social, and Corporate Governance (ESG) practices, but these investments may not be aligned to the Foundation’s mission. SRIs are treated similarly to MRIs or mission-related investments, which are investments in public companies that may align with the foundation’s mission.
Foundation endowment investment managers use SRIs and MRIs to target risk-adjusted returns, also known as “market-rate” returns. However neither SRIs more MRIs are not earmarked to achieve their aims through specific program-related investments, so they do not receive the same tax treatment.
Foundations may consider PRI to be a form of patient capital which means they do not expect the market-rate returns that they seek in their ordinary endowment investments. Unlike non-recoverable grants, if PRIs make returns they can be recycled back into the foundation’s endowment to make new investments.
Example Foundations Leading Program-Related Investments
Ford Foundation | Gates Foundation | MacArthur Foundation | Rockefeller Foundation | Skoll Foundation
Are Program-Related Investments the right capital for your business at this stage?
COMPANY PERSPECTIVE
Benefits
- Incentive to subsidize lower prices for impact-driven products and services
- Ability to reach customer segments and regions that cannot afford market prices
- Patient capital terms with longer time horizons
Challenges
- Time-consuming to find an aligned PRI foundation whose mission fits your company's goals
- A limited number of foundations using PRIs
- Companies must meet the requirements of “expenditure responsibility” and agree to be monitored
- If the company abandons the program, they are expected to repay the funding and may have IP or assets seized
Key Performance Indicators
- Social Return on Investment
- Other impact indicators designed specifically for the PRI
CAPITAL GIVER PERSPECTIVE
Benefits
- Achieve outcomes that would not otherwise have occurred through grants or market-rate investments
- PRIs count toward the required 5% annual payout of endowments to achieve ambitious program aims
- PRIs achieve both social and financial returns
- Foundations can get greater influence and control over decisions
Challenges
- Requires a complex due diligence process financial evaluation and program and mission-aligned evaluation
- Investments are high-risk and low-return by design and require an estimate of quantified expected loss
- Often, tax attorneys and lawyers are required to evaluate foundation PRIs for their permissibility and prudence
Key Performance Indicators
- Mission or program outcomes are valued above financial returns, and foundations invest even though they are likely to lose capital.
- Social Return on Investment
- Risk Share (Gates Foundation)
When it Works Well
Furthers the mission
A successful PRI is aligned to the Foundation’s stated mission in ways that involve innovative financing and program structures.
Avoids market distortion
PRIs often require subsidization, but not to the extent to which a local financial market for goods and services is distorted. Careful pricing of terms and returns align the foundation’s interests to the local region where the investment is made.
Capital matched
Foundation Program Officers and Investors must assure that the chosen capital type and terms match the company’s ability to generate returns.
Continuous monitoring
PRIs must be continuously evaluated and monitored to meet the Internal Revenue Code’s standards, and ensure proper governance of the investment expenditure.
Avoids additionality
Program-Related Investments fund programs that would not otherwise occur without the investment. This concept, known as additionality, is applied in the diligence phase to ensure the PRI is filling a gap that is not easily covered by market-rate investments.
Challenges with Program-Related Investments
Multiple experts to manage
In order to evaluate a PRI foundations need to seek subject matter expertise, financial evaluation, and legal analysis for each deal, all while balancing the overall disbursement of funds through grants and other PRI. Managing all of these experts through a complex due diligence process feels out of reach for smaller foundations.
Governance conflicts
As investors, Foundations can negotiate observer roles on the board or in other aspects of the decision-making process. If market conditions change, there may be a conflict if the stated mission of the Foundation and the original goal for the PRI becomes unfeasible. Additional investors with competing interests may not be aligned to the goals of the foundation, or in favor of the time and energy, it takes to execute a program.
Difficulty measuring outcomes
Program-related investors may have difficulty measuring the success of PRI outcomes if they lack the legal, data, and other technical expertise to monitor and evaluate.
Trends in Program-Related Investments
Combined diligence
The Gates Foundation and others have developed comprehensive diligence processes to evaluate investments from the perspective of the mission with subject matter experts, and also through the lens of investment into the capital structure.
Donor-advised funds
PRI is not just for the well-known large endowments like Ford and Gates Foundation. Donor-Advised Funds (DAFs) are charitable investing accounts that can be set up by individuals and families on smaller scales. While most focus on giving out non-recoverable charitable grants, some are starting to make impact investments using their DAF assets with an expectation of both social or environmental impact and financial return.
Technical assistance
Foundations have also begun to provide support through technical assistance, in the form of expertise and consulting support, to deliver additional capacity and help identify talent to achieve program objectives.
Before You Consider Program-Related Investments
- Do you have a discrete program that has a clear impact mission?
- Do you know of a Foundation whose mission aligns with your program goals?
- Could you commit to the rigorous governance requirements involved in managing a PRI within your company?
Exploring Program-Related Investments
- Review the extensive published information on how Gates, Ford, and other Foundations conduct PRIs.
- Look for foundation investments into companies in your sector on sites like Crunchbase.
- Participate in an impact entrepreneurship event within your sector to understand which foundations and donors are seeking PRIs.
Discover Alternative Capital
Compare Program-Related Investments to Grants and Other Types of Capital. These capital types each represent one way to grow your company, and you can choose other capital types as an alternative or pair and combine at different stages of your business. Consider these alternative capital sources or explore our Capital Library.
