7 barriers and misconceptions surrounding program-related investments - Generocity Philly

Funding

Jan. 14, 2016 10:30 am

7 barriers and misconceptions surrounding program-related investments

PRIs are super confusing, so we asked an experienced practitioner about what's holding foundations back from making them.

We're not quite sure what's going on here, either.

(Photo by Flickr user Wheezy Jefferson, used under a Creative Commons license)

A packed room of nonprofit and foundation staffers at a recent conference were asked to share the first thing that came to mind upon hearing the term “impact investing.” One by one, they stood up to share their thoughts.

  • Is social impact being swapped out for financial returns?
  • How big does your foundation need to be to build an investment portfolio?
  • Will impact investments like program-related investments (PRIs) affect foundations’ grant recipients?
  • Why are foundations using impact investing tools like PRIs so scarcely?

All questions. More importantly, all questions referencing PRIs, the only type of impact investment foundations can make that are fully recognized by the Internal Revenue Service. That doesn’t make them any less confusing.

Actually, it makes the water murkier.

Ask Dick Henriques, a senior fellow with the Center for High Impact Philanthropy at the University of Pennsylvania and a PRI veteran credited with growing the Bill and Melinda Gates Foundation‘s PRI portfolio from $50 to $700 million. Henriques is part of a team at CHIP currently neck-deep in PRI research.

Henriques will tell you there’s a single absolute truth about PRIs that cannot be avoided: Making even a singular PRI is a strategic decision that must be made unilaterally across foundation leadership.

“It’s important at the highest level that those responsible for the purse strings at the end of the day — if it’s a board of directors or if there’s a founding benefactor still alive — there needs to be passion and belief in this at that level,” Henriques said. “That’s one piece of the puzzle.”

Here are some common barriers and misconceptions surrounding PRIs, according to Henriques.

Misconceptions

  • Return rates. The misconception is that PRIs must be a below market-rate return (low-risk investment) to qualify — or, conversely, that PRIs must be an above market-rate return (high-risk investment) to qualify. Actually, both get the greenlight.
  • Authorized enterprises. The misconception is foundations are limited in what institutions they can invest in. You can invest in biotech, cleantech, fintech and even Tech Decks as long as those enterprises have a social mission. Henriques said there’s no reason foundations can’t invest right alongside a venture capitalist.
  • Investment type. The misconception is that since many PRIs are low interest-loans, low-interest loans are the only type of PRI foundations can make. Here are the actual options: everything. “There’s really no limit as far as I’ve seen on the type of vehicle you could use as a PRI,” Henriques said.

Barriers

  • PRIs are complex and difficult. A lot of the in-house expertise at foundations is not geared towards making PRIs. That’s because PRIs are largely a private sector transaction and arguably more difficult to pull off than typical private sector transactions because the PRI has to align with your mission.
  • Size matters. If you’re a small foundation, Henriques said bringing on in-house expertise will not be conducive, especially considering how inconsistent and small your PRIs will be.
  • From 5 percent or 95 percent? If you’re a private foundation, you are legally obligated to grant away 5 percent of your funds every year. Here’s the catch: You can also make PRIs from that 5 percent, though the common argument is that those grant dollars should be granted and not invested. Then there’s the remaining 95 percent (called a “corpus,” which makes sense in Latin but sounds gross in English). If you make a PRI from that 95 percent, you’re going to want to maximize your financial return. Otherwise, that money is not coming back.
  • IRS requirements. Oh, boy. This is the root of confusion. The IRS’s requirements for PRIs are just not articulated clearly. “The legal due diligence can be quite cumbersome as well,” Henriques said. “There’s also not a tremendous amount of legal expertise doing this routinely.”

From our Partners

-30-
LEAVE A COMMENT

From our Partners

Opinion: Funders can do better, but so can nonprofits

Nonprofit AF: We need to support legislation on philanthropy’s crappy, inequitable practices

When it comes to data, let’s just agree to disaggregate

SPONSORED

Generocity Philly

On June 17, First Person Arts and EMOC launch a virtual event they hope will shatter misperceptions of men of color

Philadelphia

Playworks Education Energized

Development Operations Associate

Apply Now
Philadelphia, PA

GreenLight Fund

Program Associate, GreenLight Fund Philadelphia

Apply Now
West Chester, PA

Friends Association for Care & Protection of Children

Chief Operating Officer

Apply Now

4 new findings shed light on crowdfunding for charity

COVID deaths decline, but nonprofits need help if they are going to survive

One year after George Floyd’s murder, the words from these stories still resonate

SPONSORED

Generocity Philly

Good food + good people + good cause = good times

West Chester, PA

Friends Association for Care & Protection of Children

Advancement Associate

Apply Now
Philadelphia, PA

Fairmount Ventures Inc

Associate

Apply Now
currently virtual; soon to be full or partially in-person in Philadelphia

City Year Philadelphia

Individual Giving/Donor Engagement Manager

Apply Now

Sign-up for daily news updates from Generocity