PRI 101: The Basics of Making a PRI
Grants Managers Network Conference March 17, 2010
Christa Velasquez cvelasquez@aecf.org
Topics of Presentation
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Definitions
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Benefits of PRIs
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Making PRIs
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Monitoring and tracking PRIs
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PRI accounting issues
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Resources
Bay Area Equity Fund
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$
75M private equity fundÆ 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)
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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
Defining PRIs
Program-Related Investments
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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)
Foundation Perspective: Investment Tools
Endowment
Investments
Grants
Program
Related
Investments
Programmatic Returns
Financial Returns
6Social Investment Definitions
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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
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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
Social Investment Continuum
New Frontiers in Mission-Related Investing, F.B. Heron Foundation, 2004
Why PRIs?
SI Benefits for Foundations
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Leverage
Attract other capital from banks, corps, govt by taking real/perceivedrisk
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 fornew projects
Flexibility
•Fill financing gap •Variable structure & terms
Mission
•More assets working towards mission •Augment grants
Strength
• Foster sustainability • Increase accountabilityPRI vs. Grant
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Use a grant when
ÆAffordability gap vs. financing gap
ÆExtremely high risk level
ÆSmaller $ amounts
ÆNo repayment source/repayment relies on fundraising
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Use a PRI when
ÆTrue financing gapÆReasonable risk level for expected social return
ÆLarger $ amount
ÆObvious and reliable repayment source
ÆStable competent management and board leadership
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.
Who Uses PRIs?
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320 + PRI uses reported uses
ÆFrom adoption to pharmacology to wildfire
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Recipients in 45 US states and 37 other countries
ÆFrom Alabama to Wyoming and Brazil to Yugoslavia¾
Many types of PRIs
Æloans, equity investments, lines of credit, linked deposits, real estate purchases, guarantees
Small Number of Foundations Are Making
Social Investments
Source: Compounding Impact: Mission Investing by US Foundations, FSG Social Impact Advisors, March 2007
Annual SI Volume Growing
But Still <$200 Million
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SI Program/Issue Areas
The Downside
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Can be complex and time consuming
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Requires programmatic and financial skills
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Legal fees and other transaction costs
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Negotiations and structuring potentially adversarial
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Social impact difficult to measure/ quantify
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Long-term reporting and monitoring
Making PRIs
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¾
Programmatic review and due diligence
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Investment analysis
Æ Charitable financial and business risks
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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
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Legal documentation
Æ Loan agreement & promissory note, partnership agreement
Æ May include financial and other covenants
Monitoring PRIs
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Regular reporting from investee organization
Æ Financial and programmatic dataÆ Frequency depends on foundation, investee organization, activity
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Internal tracking varies by foundation
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Portfolio management
Æ Track repayments, earnings and adjustments
Æ Assess risk of investments/portfolio
Æ Determine valuation for balance sheet
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)
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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
How PRIs Affect Payout Requirement
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Counts toward 5% payout requirement the year the
PRI is paid
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When PRI is repaid, qualifying distributions are
reduced
Æ Considered a recovery and increases required distribution
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PRIs are not included in net value of non-charitable
use assets
PRIs on Financial Statements and
General Ledger
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All PRIs booked same as any other investment @
fair market value
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Can list PRIs as a separate asset line on balance
sheet
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Can provide additional PRI details in a separate
footnote
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May be required to disclose and record loan
guarantees if they meet the contingent liability rules
PRIs Reported on 990-PF Tax Return
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Shows on balance sheet section (Part II)
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Special section (Part IX-B)
Summary of
Program-Related Investments
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Included in payout section on qualifying
distributions (Part XII)
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Recoveries are included in distributable amount
computation (Part XI)
PRIs and Expenditure Responsibility
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Some PRIs subject to ER reporting
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ER rules apply to both PRIs and grants
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PRI proceeds and earnings must be kept in
separate account by investee organization
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Resources
¾ Expenditure Responsibility Step by Step, John A. Edie
¾ Program-Related Investments: A Technical Manual for Foundations, Christie I. Baxter
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
Social Investing Resources
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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)