A $350 million impact allocation unlocked $1 billion in private investment. A low-interest loan helped a pharmaceutical company get regulatory clearance. An equity investment in a fintech company spurred better business governance.
All are examples of philanthropies investing, rather than grant-making, to advance their impact goals.
The vehicle: program-related investments, or PRIs, an underutilized tool that allows private foundations to earn a return through debt, equity and other investments made from their program budgets. Less than 0.5% of US foundations deploy funding through PRIs.
The instrument could have more impact now, with public funding for climate change, conservation, key social programs and international development in retreat.
“PRIs typify impact-first investing,” Maoz “Michael” Brown of Wharton Impact’s Impact Investing Research Lab writes in “Demystifying program-related investing.”
Follow the leader
For foundations, PRI expenditures count toward the tax-law requirement to distribute roughly 5% of their endowment assets each year. PRIs “can stretch a foundation’s program dollars by returning principal that can be redeployed for future charitable activity,” writes Brown.
Moreover, they can be deeply catalytic, both financially and for impact. The terms of Gates Foundation’s equity investment in Bangladesh-based mobile money provider bKash “compelled bKash’s board to engage in a rigorous review of its governance, which would be unusual in most grant agreements.” The Packard Foundation’s low-interest loan to Afaxys helped the pharmaceutical company clear FDA approval for a generic oral contraceptive, “expanding affordable access to contraceptive options.” The Kresge Foundation’s $350 million impact investing pool “leveraged more than $1 billion from banks, other foundations and public sector partners.”
Barriers to entry
A major obstacle for deployment is foundations’ tendency to separate management of their endowments and investment activity with their grantmaking activity. “PRIs blur this boundary,” he writes. “The traditional siloed configuration can leave program staff with a lack of understanding of PRIs, including how they can help advance a foundation’s mission.”
Structuring can also be a limiting factor. PRIs in the form of straight term loans can be fairly straightforward, but often foundations layer in other elements, like equity conversion or subordination that complicate the process and in some cases, deter future applications. One interviewee shared, “I think we made the deal more complicated than we needed to. The prospect of generating a return triggered a higher level of scrutiny and caution internally.”
Complexity, capacity, congruity
Spurring wider adoption, Brown writes, depends on “deliberately managing complexity, capacity and congruity.” As a starting point, foundations must be clear about “why they are pursuing PRIs and ensure alignment across purpose, risk appetite, administrative style, organizational cohesion, and leadership commitment. He encourages them to borrow templates from philanthropic peers; work through experienced intermediaries, like impact fund managers and community development financial institutions; and lean on co-investors to share due diligence costs and monitoring responsibilities.
“Proceeding without adequate congruity,” he writes, “invites self-imposed barriers more significant than any inherent difficulty of PRIs.”
