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(1)

PRI 101: The Basics of Making a PRI

Grants Managers Network Conference March 17, 2010

Christa Velasquez cvelasquez@aecf.org

(2)

Topics of Presentation

¾

Definitions

¾

Benefits of PRIs

¾

Making PRIs

¾

Monitoring and tracking PRIs

¾

PRI accounting issues

¾

Resources

(3)

Bay Area Equity Fund

¾

$

75M private equity fund

Æ Invests in companies in low income communities of the Bay Area

Æ Partnership with Bay Area Council for deal flow and workforce development ¾ $1.65M Casey equity investment (PRI)

Æ 10 year partnership

Æ Originally set PRI-like return expectation of 10-12% (now performing in top quartile)

3

¾ 10 year goal of 1,500 new jobs created

Æ Cumulative jobs created since inception (2007YE): 1,163

Æ Cumulative jobs for low-income individuals created: 628

(4)

Defining PRIs

(5)

Program-Related Investments

¾

Make foundation funds available for charitable

purposes (like grants)

but

¾

Generally come back to the Foundation, with

some interest (unlike grants)

and

¾

Can never be made for the primary purpose of

financial gain (unlike regular Foundation

investments)

(6)

Foundation Perspective: Investment Tools

Endowment

Investments

Grants

Program

Related

Investments

Programmatic Returns

Financial Returns

6

(7)

Social Investment Definitions

¾

PRIs only category with a legal IRS definition

Æ Primarily to achieve program goals

Æ Terms must be below market on a risk-adjusted basis

Æ Does not support lobbying

Æ Must be investigated, documented and monitored

¾

Foundations may make other charitable investments

that don’t qualify as PRIs

Æ Financial return primary or equal goal with social return

Æ Emerging philosophy of using all (or more) assets to support mission

Æ Terms may include

– Social investing, Mission investing – Socially responsible investing

– Mission-related investing – Integrated investing

– Double/triple bottom line investing

(8)

Social Investment Continuum

New Frontiers in Mission-Related Investing, F.B. Heron Foundation, 2004

(9)

Why PRIs?

(10)

SI Benefits for Foundations

10

Leverage

Attract other capital from banks, corps, govt by taking real/perceived

risk

Feasibility

Proof of concept (prove creditworthiness)

Pay-out

Can help meet distribution requirement (PRIs)

Size

Can fund larger projects that exceed typical grant amounts (PRIs)

Recyclable

Can be redeployed for

new projects

Flexibility

•Fill financing gap •Variable structure & terms

Mission

•More assets working towards mission •Augment grants

Strength

• Foster sustainability • Increase accountability

(11)

PRI vs. Grant

¾

Use a grant when

ÆAffordability gap vs. financing gap

ÆExtremely high risk level

ÆSmaller $ amounts

ÆNo repayment source/repayment relies on fundraising

¾

Use a PRI when

ÆTrue financing gap

ÆReasonable risk level for expected social return

ÆLarger $ amount

ÆObvious and reliable repayment source

ÆStable competent management and board leadership

(12)

PRIs & Grants

as Complementary Tools

¾ E&Co, an energy investment intermediary, proposed to develop small to medium enterprises in order to disseminate solar energy systems to rural poor people in Tanzania.

¾ The Lemelson Foundation:

Gave $180K grant to identify, screen, and develop the business capacities of small retailers.

And

A $400,000 program-related investment for E&Co to disburse to small retailers to

start or strengthen their business.

(13)

Who Uses PRIs?

¾

320 + PRI uses reported uses

ÆFrom adoption to pharmacology to wildfire

¾

Recipients in 45 US states and 37 other countries

ÆFrom Alabama to Wyoming and Brazil to Yugoslavia

¾

Many types of PRIs

Æloans, equity investments, lines of credit, linked deposits, real estate purchases, guarantees

(14)

Small Number of Foundations Are Making

Social Investments

Source: Compounding Impact: Mission Investing by US Foundations, FSG Social Impact Advisors, March 2007

(15)

Annual SI Volume Growing

But Still <$200 Million

15

(16)

16

SI Program/Issue Areas

(17)

The Downside

¾

Can be complex and time consuming

¾

Requires programmatic and financial skills

¾

Legal fees and other transaction costs

¾

Negotiations and structuring potentially adversarial

¾

Social impact difficult to measure/ quantify

¾

Long-term reporting and monitoring

(18)

Making PRIs

18

¾

Programmatic review and due diligence

¾

Investment analysis

Æ Charitable financial and business risks

¾

PRI determination

Æ Risk-return profile not attractive to ordinary investors

Æ “But for” the charitable purpose to be accomplished, the foundation would not make the investment

¾

Legal documentation

Æ Loan agreement & promissory note, partnership agreement

Æ May include financial and other covenants

(19)

Monitoring PRIs

¾

Regular reporting from investee organization

Æ Financial and programmatic data

Æ Frequency depends on foundation, investee organization, activity

¾

Internal tracking varies by foundation

¾

Portfolio management

Æ Track repayments, earnings and adjustments

Æ Assess risk of investments/portfolio

Æ Determine valuation for balance sheet

(20)

Environmental PRI

Root Capital

¾ Moriah Fund interested in rural development strategies that

improve the livelihoods of rural and indigenous communities while conserving and managing natural resources and

biodiversity in a sustainable manner

¾ Loan to Root Capital (EcoLogic Finance)

20

¾$100,000 5 year loan at 2%

-Restricted for use only in Guatemala -Small business loans to rural producer organizations that have existing sales relationships with green market makers

(21)

How PRIs Affect Payout Requirement

¾

Counts toward 5% payout requirement the year the

PRI is paid

¾

When PRI is repaid, qualifying distributions are

reduced

Æ Considered a recovery and increases required distribution

¾

PRIs are not included in net value of non-charitable

use assets

(22)

PRIs on Financial Statements and

General Ledger

¾

All PRIs booked same as any other investment @

fair market value

¾

Can list PRIs as a separate asset line on balance

sheet

¾

Can provide additional PRI details in a separate

footnote

¾

May be required to disclose and record loan

guarantees if they meet the contingent liability rules

(23)

PRIs Reported on 990-PF Tax Return

¾

Shows on balance sheet section (Part II)

¾

Special section (Part IX-B)

Summary of

Program-Related Investments

¾

Included in payout section on qualifying

distributions (Part XII)

¾

Recoveries are included in distributable amount

computation (Part XI)

(24)

PRIs and Expenditure Responsibility

¾

Some PRIs subject to ER reporting

¾

ER rules apply to both PRIs and grants

¾

PRI proceeds and earnings must be kept in

separate account by investee organization

¾

Resources

¾ Expenditure Responsibility Step by Step, John A. Edie

¾ Program-Related Investments: A Technical Manual for Foundations, Christie I. Baxter

(25)

Social Investing Resources

¾ More for Mission Campaign: www.moreformission.org ¾ PRI Makers Network: www.primakers.net

¾ Global Impact Investing Network (GIIN):

http://www.rockfound.org/efforts/impact_investing/impact_inv esting.shtml

¾ Foundation Center: www.fdncenter.org (PRI Directory)

¾ Grantcraft: www.grantcraft.org (PRI grantcraft guide)

¾ Social Investment Forum: www.socialinvest.org

¾ Council on Foundations: www.cof.org (Resources for Grantmakers)

¾ Investor’s Circle: www.investorscircle.net

(26)

Social Investing Resources

26

¾ Boston College Institute of Responsible Investment:

www.bcccc.net (handbook of asset classes)

¾ Cambridge Associates Mission Investing Group:

www.cambridgeassociates.com

¾ FSG Social Impact Advisors: www.fsg-impact.org (mission investing study)

¾ Monitor Institute: www.monitorinstitute.com (Investing for

Social & Environmental Impact report: www.qk18ad7x79.web.aplus.net)

¾ Opportunity Finance Network: www.opportunityfinance.net

(CARS rating system)

¾ Rockefeller Philanthropy Advisors: www.rockpa.org (trustee handbook)

References

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