Program Related Investment

Program Related Investment: My Adventures in Impact Investing (and How You Can Get Started)

Okay, let’s talk Program Related Investments, or PRIs. Sounds technical, right? Like something reserved for Wall Street wizards and philanthropy gurus. Honestly, that’s what I thought for the longest time. But trust me, once you understand the nuts and bolts, PRIs can be a seriously powerful tool for creating positive change in the world – while still being responsible with your investments.

I stumbled into the world of PRIs a few years ago while working with a small family foundation. Our mission was simple: support innovative solutions to address climate change. We were awarding grants, which was great, but we felt like we could be doing more. That’s when someone mentioned PRIs. At first, I was completely lost. Investment? Philanthropy? How did those even mix?

Well, sit back, grab a cup of coffee (or your beverage of choice), and let me walk you through what I’ve learned. We’re going to dissect PRIs, explain why they’re awesome, and hopefully inspire you to consider adding them to your own toolkit for social impact.

What Exactly is a Program Related Investment (PRI)?

Think of a PRI as a kind of hybrid between a charitable grant and a traditional investment. It’s an investment made by a foundation or other philanthropic organization in a mission-aligned project or organization. The goal is to advance the foundation’s charitable purpose, not necessarily to generate a significant financial return (although that’s definitely a bonus!).

The IRS has specific guidelines for what qualifies as a PRI, and it’s crucial to understand them. Essentially, the primary purpose must be to further charitable activities, not to generate profit. The investment wouldn’t have been made but for its relationship to the foundation’s exempt purposes. To simplify: the investor must carefully document that its intent is primarily charitable.

Think of it like this: a foundation wants to help low-income communities access affordable housing. Instead of simply awarding grants to housing organizations, they could make a PRI – a loan or equity investment – in a community development financial institution (CDFI) that provides financing for affordable housing projects. The CDFI uses the investment to build more homes, helping the community and fulfilling the foundation’s mission.

This brings us to some crucial aspects that must be observed. PRIs typically aren’t made available from commercial sources, which means that the investor is taking on more risk than a conventional lender, and the rates are usually concessionary. The investor, in effect, subsidizes some of the borrower’s costs, though the borrower must still intend to pay back the loan as documented in the agreement.

Why Bother With PRIs? The Power of Leveraging Resources

Okay, grants are great. I’m not knocking them. But PRIs offer some serious advantages that traditional philanthropy often misses:

• Leverage and Scale: Imagine a foundation awarding a grant of $100,000 to a non-profit. That’s amazing! Now, imagine that same foundation making a $100,000 PRI that unleashes $1 million in additional capital through a revolving loan fund. That’s leverage! PRIs can attract other investors and magnify the impact of your philanthropic dollars exponentially.

• Sustainability: Grants are often a one-time shot. PRIs, on the other hand, can be recycled. When the investment is repaid (or the equity is sold), the funds can be reinvested in another impactful project. This creates a sustainable cycle of positive change. Some describe this as a multiplier effect.

• Innovation: PRIs can support innovative solutions that are too risky or unproven for traditional investors. They provide patient capital that allows social enterprises to test new models and scale their operations.

• Accountability: Because PRIs are investments, there’s a greater emphasis on accountability and performance. The recipient organization is expected to manage the funds responsibly and achieve specific social and financial targets. This fosters stronger partnerships and better outcomes.

• Impact investing: PRIs serve as a gateway for organizations to get involved in broader impact investing, sometimes called “mission-related investing.” Over time, an investor may adjust its asset allocation toward more mission-related investments, so PRIs serve as a good starting point.

The PRI Landscape: What Types of Investments Are Possible?

PRIs aren’t just about loans. They can take many forms, depending on the needs of the project and the foundation’s goals:

• Low-Interest Loans: This is probably the most common type of PRI. Foundations provide financing at below-market rates to organizations that are working to address social or environmental problems.

• Loan Guarantees: A foundation can guarantee a loan made by a bank or other lender to a social enterprise. This reduces the lender’s risk and makes it easier for the organization to access capital.

• Equity Investments: Foundations can invest in the equity of social enterprises, taking a stake in the company’s ownership. This provides growth capital and allows the foundation to share in the company’s success.

• Linked Deposits: A foundation can deposit funds in a bank or credit union that uses those funds to make loans to underserved communities or businesses.

• Program-Related Expenses: Some expenses necessary to conducting PRI activity can themselves be considered a PRI.

Who Benefits From PRIs? A Wide Range of Possibilities

PRIs can be used to support a wide range of organizations and projects, including:

• Community Development Financial Institutions (CDFIs): CDFIs provide financing to low-income communities for housing, small businesses, and other community development projects.
• Affordable Housing Developers: PRIs can help finance the construction and rehabilitation of affordable housing units.
• Social Enterprises: PRIs can provide growth capital to businesses that are addressing social or environmental problems, such as fair-trade businesses, renewable energy companies, and sustainable agriculture ventures.
• Non-profits with Revenue-Generating Activities: PRIs can support non-profits that are developing earned income streams to diversify their funding base.
• Educational institutions: Colleges, universities, and vocational schools are sometimes recipients of PRIs for specific programs that fulfill a charitable purpose.

Deep Dive: The IRS Rules of the Game (Because You Can’t Ignore Them!)

Okay, this is where it gets a little technical, but bear with me. The IRS has specific rules for what qualifies as a PRI. If you don’t follow these rules, you could jeopardize your foundation’s tax-exempt status. Here are the key things to keep in mind:

• Primary Purpose: The primary purpose of the investment must be to further the foundation’s exempt purposes (charitable, educational, etc.). The financial return should be secondary. You have to document the intent to make a charitable loan that others wouldn’t make.

• No Significant Purpose of Financial Return: The investment cannot have as one of its significant purposes the production of income or the appreciation of property. Think of it this way: if a commercial investor would make the same investment, it’s probably not a PRI.

• Jeopardy Investment Rules Don’t Apply: The investment cannot be a “jeopardy investment,” meaning it can’t jeopardize the foundation’s ability to carry out its exempt purposes. This means carefully evaluating the risks involved and ensuring that the investment is prudently managed.

• Documentation is Key: Meticulously document your reasoning for considering it a PRI. Maintain detailed records of the investment, including the due diligence process, the terms of the agreement, and the impact achieved.

• Ongoing monitoring: Ensure that the borrower is actually fulfilling its promises, and maintain detailed records of this activity.

It’s always a good idea to consult with legal counsel and financial advisors who specialize in PRIs to ensure that you’re complying with all the IRS requirements. Believe me, it’s worth the investment! There are many PRI advisors who can guide you through this process, which is typically money well spent, especially when first getting started.

My Own PRI Adventure: Lessons Learned in the Trenches

Okay, back to my story. Remember that family foundation I was working with? After doing a ton of research and talking to experts, we decided to take the plunge and make our first PRI. We invested in a company that was developing innovative solar energy solutions for low-income communities.

It wasn’t easy. We had to navigate a complex due diligence process, negotiate the terms of the investment, and closely monitor the company’s performance. It was a learning experience, to say the least.

We ran into a few snags along the way. It’s always important to learn, and we certainly did. The company had a difficult time scaling its operations, and at one point, we worried that we wouldn’t get our money back.

But in the end, it was a success. The company developed a groundbreaking solar energy system that has provided affordable electricity to thousands of families. And, to our delight, we eventually recovered our principal plus a small return to deploy in further mission-related investments, and we had the satisfaction of knowing that we had played a part in making it happen.

Here are some of the key lessons I learned during that process:

• Due diligence is crucial. Don’t skimp on it. Thoroughly vet the organization or project you’re considering investing in. Understand their business model, their financial situation, and their social impact.
• Impact measurement is essential. Define clear social and environmental goals and track your progress towards achieving them. This will help you assess the effectiveness of your PRI and make adjustments as needed.
• Collaboration is key. Partner with other foundations, investors, and experts to share knowledge and resources.
• Don’t expect quick returns. PRIs are long-term investments. Be patient and be prepared to weather some challenges along the way.
• Develop a Theory of Change: To truly assess impact, think carefully about the steps that result in a positive outcome and ensure that the PRI investment actively helps in making that result more likely.

Getting Started: Your PRI Action Plan

Ready to explore the world of PRIs? Here’s a step-by-step plan to get you started:

1. Define your mission. What social or environmental problems are you most passionate about addressing? This will help you identify potential PRI opportunities.

2. Research the PRI landscape. Talk to other foundations, investors, and experts who are active in the PRI space. Attend conferences and workshops to learn more about best practices.

3. Develop your PRI strategy. Determine what types of investments you’re interested in making, what sectors you want to focus on, and how you’ll measure your impact.

4. Identify potential PRI opportunities. Reach out to organizations that are working to address the problems you care about. Conduct due diligence on potential investments.

5. Structure the investment. Negotiate the terms of the agreement, including the interest rate, repayment schedule, and reporting requirements.

6. Monitor the investment. Track the organization’s performance and impact. Be prepared to provide support and assistance as needed.

7. Share your learning. Document your experiences and share your insights with others. This will help to build the field of PRIs and encourage more foundations to get involved.

Common Misconceptions About Program Related Investments

Let’s bust some myths. I heard these along the way, and they definitely gave me pause.

• “PRIs are too risky.” Yes, there’s some risk involved, but it’s manageable with proper due diligence. Plenty of PRIs have generated decent social outcomes while returning the principal.
• “PRIs are too complicated.” They can be complex, but with the right guidance and resources, anyone can learn to navigate the PRI landscape.
• “PRIs are only for large foundations.” Not true! Even smaller foundations can make PRIs, and there are plenty of resources available to help them get started.
• “PRIs don’t generate financial returns.” While the primary purpose of a PRI is to further charitable goals, many PRIs do generate some financial return, which can then be reinvested in other impactful projects.
• “PRIs are just a way for foundations to look good.” If they are done right, PRIs are real investments. While PRIs may improve a foundation’s public image, the true intent is to create genuine social change.

The Future of PRIs: A Bright Outlook for Impact

I’m optimistic about the future of PRIs. As more foundations and philanthropic organizations realize the power of leveraging their resources, I believe PRIs will become an increasingly important tool for addressing the world’s most pressing challenges.

There’s a growing ecosystem of organizations providing technical assistance, impact measurement tools, and investment opportunities. This makes it easier than ever for foundations to get involved in PRIs. The increased focus on social impact investing is only serving to emphasize the power of PRIs in meeting current social needs.

So, what are you waiting for? Dive in, explore the possibilities, and join the movement to create a better world through Program Related Investments. I know I’m glad I did!

FAQs About Program Related Investments

1. What’s the difference between a grant and a PRI?

A grant is a donation, while a PRI is an investment. A grant doesn’t need to be repaid, while a PRI typically involves repayment of principal (and sometimes interest). PRIs generate greater leverage and can allow capital to be deployed multiple times.

2. What kind of organizations can receive PRIs?

A broad range of organizations, including CDFIs, affordable housing developers, social enterprises, and non-profits with revenue-generating activities.

3. How do I find PRI opportunities?

Start by researching organizations that are working to address the social or environmental problems you care about. Attend conferences and workshops, and network with other foundations and impact investors.

4. What are the risks of making PRIs?

The risks depend on the specific investment, but they can include financial losses, operational challenges, and reputational risks. Thorough due diligence is crucial.

5. Are PRIs really worth the effort?

Absolutely! PRIs can be a powerful tool for creating positive change, leveraging resources, and fostering innovation. Plus, they’re a great learning experience!

Now you know my journey through the world of PRIs. While this journey can be challenging, it’s definitely an experience that’s worth the effort!