Program-Related Investments

If you find that fulfilling your foundation’s mission solely by awarding grants is too limiting and want to not only help a worthy nonprofit but encourage others to follow suit, you may want to consider a program-related investment.

PRIs are made by foundations to aid social enterprises, community banks and other nonprofit entities that would otherwise lack access to investment capital. Programs devoted to education, the environment, arts and culture, and public health are among the sectors frequently targeted by PRIs.

Unlike grants, however, PRIs are expected to be repaid either by a below-market loan, a loan guarantee (where the foundation offers its assets as collateral for a bank loan) or an equity stake. PRIs are meant to fulfill philanthropic goalsrather than provide a steady income stream that could be expected from investments in stocks or bonds.

So, why would a foundation pursue a PRI rather than a grant? One explanation comes from the Knight Foundation, which has PRIs in its portfolio.

Like other program activities, these projects promote informed and engaged communities but unlike most, they seek to harness market forces to build significant income and/or raise subsequent private sector funds as a core part of the charitable outcome operations.

In these cases, PRIs provide important incentives to bolster the likelihood of success. Because there is an expectation of repayment, PRIs push recipients to strengthen their capacity by improving cash flow, building financial capacity and creating a track record necessary for subsequent financing.

One example of a successful PRI comes from the Ford Foundation, which pioneered the use of PRIs in 1968. In the late 1970s, the foundation loaned the then-fledgling Studio Museum of Harlem $1.05 million to buy a building so it could expand. That enabled the museum to stage large exhibits, hold concerts and other events that attracted large crowds and new revenue. The loan, which was repaid in full, facilitated a capital campaign and government grants.

“Although the foundation charged interest on the loan, it did not get the same return it would have received from a market investment,” a Ford report said. “But the high social returns on the project—the sense of pride in ownership, the museum’s increased visibility, the development of skills for the people involved—justified the lower return.”

PRIs are frequently tailored to the specific needs of a recipient. That can make them more effective than grants, which sometimes have strict criteria for how they can be used. In addition, foundations may be inclined to provide more funding through a PRI than a grant, knowing the likelihood of repayment.

The MacArthur Foundation, which has made more than $450 million in PRIs, says this strategy also provides recipients:

  • Unconventional financing and guarantees that are low-cost—such as interest-free loans—and are risk tolerant and creatively structured.
  • Otherwise unattainable access to experts who can provide greater visibility, engagement, and advice.
  • A meaningful way to test innovative approaches to new projects, businesses and social ventures.

PRIs count toward a foundation’s requirement under federal law to pay out at least 5 percent of its total assets annually. The IRS treats PRIs yet to be paid back as a “charitable use asset.” That means the PRI is not included in the calculation of total assets. PRIs are also exempt from the excess business holdings tax levied on investments that make up more than a 20 percent interest in a for-profit enterprise.

Perhaps most importantly, PRIs trigger a safe-harbor rule that protects foundations and their managers from being hit with an excise tax for so-called jeopardizing investments that could endanger the foundation’s finances. At the same time, PRIs cannot be devised to compete with for-profit ventures, though the activities they fund can turn into a profitable product or business.

PRIs are not just for the mega-foundations. They can be initially funded for a few thousand dollars. However, they should not make up a large percentage of any foundation’s portfolio in case they cannot be repaid.  

PRIs have been described as “bad investments for a good cause.” It’s true: you’re not going to get rich with a PRI, nor are you supposed to. Then again, you can’t put a price tag on funding a promising but unproven social enterprise that succeeds in effecting meaningful change. Good causes tend to be their own rewards.