PRI Fundamentals for Grantmakers


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  • PRI Makers Institute
  • PRI Makers Institute
  • PRI Makers Institute
  • PRI Makers Institute
  • PRI Makers Institute
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  • PRI Makers Institute
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  • PRI Makers Institute
  • PRI Makers Institute
  • PRI Makers Institute
  • PRI Makers Institute
  • PRI Makers Institute
  • PRI Makers Institute
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  • PRI Fundamentals for Grantmakers

    1. 1. <ul><ul><li> Program Related Investments </li></ul></ul><ul><ul><li>Fundamentals for Grantmakers </li></ul></ul><ul><ul><li>Susan Halliday, Jacobs Family Foundation </li></ul></ul><ul><ul><li>Alvertha Penny, California Community Foundation </li></ul></ul><ul><ul><li>Ed Diener, Skoll Foundation </li></ul></ul>© 2007 PRI Makers Network <ul><ul><li>PRI Institute </li></ul></ul><ul><li>PRI Makers Network – Northern California Grantmakers </li></ul><ul><li>March 27, 2007 </li></ul><ul><li>Prepared by Greg Ratliff, Lisa Richter </li></ul><ul><li> </li></ul>
    2. 2. Outline <ul><li>Introduction to Program Related Investments </li></ul><ul><ul><li>Defining PRIs </li></ul></ul><ul><ul><li>Motivation for PRIs: Strategic Benefits </li></ul></ul><ul><ul><li>The PRI/MRI/SRI/”Social Capital” Marketplace </li></ul></ul><ul><ul><li>Getting Started with PRIs </li></ul></ul><ul><li>Break </li></ul><ul><li>Case Studies </li></ul><ul><ul><li>Alvertha Penny, California Community Foundation </li></ul></ul><ul><ul><li>Susan Halliday, Jacobs Family Foundation </li></ul></ul><ul><ul><li>Ed Diener, Skoll Foundation </li></ul></ul>© 2007 PRI Makers Network
    3. 3. <ul><li>“ The prototype of charity that serves as a model of compassion is the story of the Good Samaritan. When a traveler discovers someone beaten and badly in need of assistance along a public road, he stops and provides assistance. But what happens if each day that he travels the road he finds someone at the very same spot badly beaten and in need of assistance. Compassion requires that he give aid, but eventually compassion requires that he ask the question “Who has responsibility for policing the road.” One is charity. The other is strategic philanthropy. One is working to ameliorate consequences. The other is working to eliminate causes.” </li></ul><ul><ul><ul><ul><li>James A. Joseph </li></ul></ul></ul></ul><ul><ul><ul><ul><li>President Emeritus, Council on Foundations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Chairman, Louisiana Disaster Recovery Foundation </li></ul></ul></ul></ul><ul><ul><ul><li>“ Sound PRIs work in philanthropy the same way that commercial loans and investment capital work in the economy; they add capacity and increase productivity. Their impact is great because they advance philanthropic enterprises that can generate a lot, but not all, of their own steam.” </li></ul></ul></ul><ul><ul><ul><ul><li>Paul Lingenfelter </li></ul></ul></ul></ul><ul><ul><ul><ul><li>former Director of Program Evaluation, MacArthur Foundation </li></ul></ul></ul></ul>Introduction to PRIs © 2007 PRI Makers Network
    4. 4. Conventional Philanthropic Investing Continuum © 2007 PRI Makers Network Fund Grants from Earnings ~ 5% of assets Primary Motivation: Maximize social return on grants funded by at least 5% of assets per year. Invest Endowment Assets 95%+ of assets Primary Motivation: Maximize financial return to fund annual grant payout of at least 5% of assets while preserving Endowment.  
    5. 5. Conventional Philanthropic Investing Continuum <ul><li>Limitations of Conventional Foundation Approach: </li></ul><ul><ul><li>Individual project timing and financing needs may outstrip grant resources. </li></ul></ul><ul><ul><li>Broader scale of social needs and charitable opportunities outstrips grant resources. </li></ul></ul><ul><ul><li>Assets deployed 95% for financial return, 5% for mission. </li></ul></ul><ul><ul><li>Fewer dollars for grantmaking in down markets. </li></ul></ul><ul><ul><li>Pressure for hasty grants in up markets and periods of new endowment. </li></ul></ul><ul><li>Opportunity: Apply discipline of capital markets to invest a portion of foundation resources, which can increase and stabilize strategic philanthropic distributions over time. </li></ul>© 2007 PRI Makers Network
    6. 6. Invention and Authorization of PRIs <ul><li>Benjamin Franklin ahead of his time in 1790 : </li></ul><ul><ul><li>Endowed trust of 2,000 pounds sterling ($300,000) to lend to apprentices and tradesman at 5% interest. </li></ul></ul><ul><ul><li>High repayment led to trust assets of $5 million by 1990. </li></ul></ul><ul><li>Ca. 1970 contemporary PRI model devised: </li></ul><ul><ul><li>John Simon (Taconic Foundation and Yale Law School) and Louis Winnick (Ford Foundation), 1968. </li></ul></ul><ul><ul><li>To lend to nonprofit organizations and invest in minority businesses lacking access to conventional capital markets. </li></ul></ul>© 2007 PRI Makers Network
    7. 7. Legal Definition of PRI 1 <ul><li>The primary purpose of the investment is to accomplish one or more of the charitable, religious, scientific, literary, educational and other exempt purposes described in section 170(c)(2)(B) of the Code; </li></ul><ul><li>No significant purpose of the investment is the production of income or the appreciation of property; and </li></ul><ul><li>No purpose of the investment is to lobby, support or oppose candidates for public office or to accomplish any of the other political purposes forbidden to private foundations by section 170(c)(2)(D) of the Code. </li></ul><ul><li>1 Source: Tax Reform Act of 1969. </li></ul>© 2007 PRI Makers Network
    8. 8. New Philanthropic Investing Continuum © 2007 PRI Makers Network Grants Primary Motivation: Social Return Investments Primary Motivation: Financial Return   <ul><li>MRIs: Mission Related Investments </li></ul>PRIs: Program Related Investments  
    9. 9. New Philanthropic Investing Continuum <ul><li>Investments can include a full range of “asset classes” —debt, equity, real estate, loan guarantees, or deposits—and can be structured as: </li></ul><ul><ul><li>Program Related Investments (PRIs) with a concessionary risk-adjusted financial return, which can be counted as part of a foundation’s distribution requirement, or </li></ul></ul><ul><ul><li>Mission Related Investments (MRIs) from the endowment that provide sufficient risk-adjusted financial return to fulfill a foundation’s fiduciary responsibility to preserve endowment and avoid “jeopardizing investments.“ </li></ul></ul><ul><ul><li>  </li></ul></ul><ul><li>Example: The F.B. Heron Foundation invests 25% of its assets to support mission: 7% in PRI + 18% in MRI (in addition to grants). </li></ul>© 2007 PRI Makers Network
    10. 10. PRIs in the Investing Continuum © 2007 PRI Makers Network Fixed Income Below-Market Investments Guarantees Senior Loans Subordinated Loans Equity Grant Cash Cash Public Equity Private Equity Cash Not Risk-Adjusted Market Rate Investments Risk-Adjusted Market Rate Investments Private Equity Adapted with permission from F.B. Heron Foundation’s “New Frontiers in Mission-Related Investing” Program-Related Investments
    11. 11. PRI Accounting <ul><li>PRI can be counted as part of 5% distribution in year that it is made. </li></ul><ul><li>Asset Value of PRI is not included in calculation of Foundation’s asset base and distribution requirement during time that PRI is outstanding. </li></ul><ul><li>Income on PRI adds to Foundation’s general revenue. </li></ul><ul><li>In year that PRI matures, entire balance is treated as a “negative distribution” and is recycled into new grants or PRIs. </li></ul>© 2007 PRI Makers Network
    12. 12. PRI Accounting: Losses <ul><li>A defaulted PRI becomes a grant. </li></ul><ul><li>Cumulative PRI loss rates since inception are in the 4% range, adjusting for outliers.* </li></ul><ul><ul><li>That’s 96% return of principal compared to a grant—plus any interest on the PRI. </li></ul></ul><ul><ul><li>Loss rates on equity investments and/or international PRIs are higher than for domestic lending, but still manageable. </li></ul></ul><ul><ul><li>* Source: FSG Social Impact Advisors, Report to be published Spring, 2007. </li></ul></ul>© 2007 PRI Makers Network
    13. 13. PRI Accounting: Losses <ul><li>Representative Loss Rates from MacArthur Foundation’s initial 10 years of making PRIs: </li></ul><ul><ul><li>Housing $45,650,000 invested </li></ul></ul><ul><ul><li>Losses: none </li></ul></ul><ul><ul><li>Business: $24,183,750 invested </li></ul></ul><ul><ul><li>Losses $700,000 or 2.9% </li></ul></ul><ul><ul><li>Program-related Enterprises: $18,195,000 invested </li></ul></ul><ul><ul><li>Losses $1,474,000 or 8.1% </li></ul></ul><ul><li>Use of specialized intermediaries is a “best practice” that manages risk and lowers loss rates. </li></ul>© 2007 PRI Makers Network
    14. 14. Strategic Benefits for Foundation <ul><li>Recyclable: Once repaid PRIs can be redeployed for new projects, extending philanthropic resources. </li></ul><ul><li>Size: PRIs can provide capital for larger projects that exceed typical grant amounts. </li></ul><ul><li>Leverage: PRIs can attract other sources of funding from banks, corporations and government. </li></ul><ul><li>Pay-out: During rapid asset growth PRIs help meet immediate distribution requirements with the likelihood capital will be available in the future. </li></ul>© 2007 PRI Makers Network Incorporates material from Ford Foundation
    15. 15. Strategic Benefits of PRI for Investees <ul><li>Capacity: Access to larger pools of capital when needed to support strategic growth and projects. </li></ul><ul><li>Strength: PRIs help foster management capacity as repayment obligations require financially disciplined approach to programs and strategies. </li></ul><ul><li>Self-Sufficiency: PRIs support investee efforts to build self-sufficiency through earned income. </li></ul><ul><li>Credibility: Over time, PRI investees develop credit history, leading to more bankable organizations. </li></ul><ul><li>Relationship: PRIs establish a long term relationship between investor and investee, with built in accountability that is unusual in grant relationships. </li></ul>© 2007 PRI Makers Network
    16. 16. Strategic Benefits of PRI for Society/Market <ul><li>PRIs promote financial structures and markets that foster sustainable social benefit: </li></ul><ul><ul><li>Leverage: Flexible, low-cost, first loss PRI capital encourages financial institutions and other investors to take risks they might otherwise avoid. </li></ul></ul><ul><ul><li>Proving Markets: In emerging markets, PRI capital can stimulate new segments, e.g., minority business, organic coffee, affordable housing, sustainable timber, retail financial services for the underbanked. </li></ul></ul><ul><li>PRIs are a means for the private sector to drive a social change agenda regardless of shifting political will or quarterly corporate profit expectations. </li></ul>© 2007 PRI Makers Network
    17. 17. PRI Marketplace: Supply <ul><li>Spring 2007: FSG Report to describe $2.3 billion of social investments--mostly PRIs. Current published data covers activity for 2000 - 2001: </li></ul><ul><li>135 leading PRI providers </li></ul><ul><ul><li>667 charitable investments </li></ul></ul><ul><ul><li>$421 million </li></ul></ul><ul><ul><li>More than two-thirds is PRI debt (loans). </li></ul></ul><ul><li>Top 10 funders provide 60% of investments. </li></ul><ul><ul><li>Top 56 funders provided 92.5%. </li></ul></ul><ul><li>Asset size not a significant determinant of making PRIs. </li></ul><ul><li>Every PRI investor has a different profile based upon mission, geography, risk/return appetite, experience. </li></ul><ul><li>Source: Annie E. Casey Foundation analysis based upon data from PRI Directory, 2003. Foundation Center. </li></ul>© 2007 PRI Makers Network
    18. 18. PRI Marketplace: Supply 2000 – 2001 © 2007 PRI Makers Network PRI Amounts # % $ (000s) % $10 million + 2 0.3 24,911 7.1 $5 – $10 million 8 1.2 51,225 14.6 $1 – $5 million 96 14.9 176,747 50.3 $500,000 – $1 million 61 9.4 36,567 10.4 $100,000 – $500,000 233 36.1 52,491 14.9 $50,000 – 100,000 95 14.7 5,795 1.6 $25,000 – $50,000 76 11.8 2,549 0.7 $10,000 – $25,000 75 11.6 1,199 0.3 Total 646 100.0 351,484 100.0
    19. 19. PRI Marketplace: Supply by Program 2000 – 2001 ($) © 2007 PRI Makers Network
    20. 20. PRI Marketplace: Supply <ul><li>Foundations making PRIs for community development: </li></ul><ul><li>Place Based: </li></ul><ul><ul><li>Gund and Cleveland Foundations, Cleveland </li></ul></ul><ul><ul><li>California Community Foundation </li></ul></ul><ul><ul><li>Jacobs Family Foundation, San Diego </li></ul></ul><ul><ul><li>Meadows Foundation, Dallas </li></ul></ul><ul><ul><li>Meyer Memorial Trust, Oregon </li></ul></ul><ul><li>National and International : </li></ul><ul><ul><li>Annie E. Casey Foundation, emphasized regions/national; also does MRI </li></ul></ul><ul><ul><li>Heron Foundation, national/emphasized regions; also does MRI </li></ul></ul><ul><ul><li>Ford Foundation, national and international </li></ul></ul><ul><ul><li>MacArthur Foundation, national and international </li></ul></ul><ul><ul><li>Skoll Foundation, social enterprise/national and international </li></ul></ul>© 2007 PRI Makers Network
    21. 21. PRI Marketplace: Ford Foundation Early Examples © 2007 PRI Makers Network
    22. 22. PRI Marketplace: Recent Examples <ul><li>Specialized, collaborative local initiatives </li></ul><ul><li>Community Development Financial Institutions (CDFIs) and Intermediaries reinvesting in housing, small business, child care, charter schools, and asset building in low income communities. </li></ul><ul><li>Land Purchases for environmental conservation or community development. </li></ul>© 2007 PRI Makers Network
    23. 23. PRI Marketplace: Recent Examples <ul><li>New York Acquisition Fund , $200 million for bridge loans to finance site acquisition. Offers Loan to Value of up to 130% for nonprofits and 95% for for-profits developers. </li></ul><ul><li>Market Creek Plaza , $23.5 million commercial and cultural center built on the former site of a 20-acre abandoned factory in San Diego. </li></ul><ul><li>Wilson Historic District, a nonprofit community owned and operated by the Meadows Foundation of Dallas since 1981. Goal was to preserve remaining Victorian structures as well as provide attractive space for numerous, varied nonprofit organizations. </li></ul><ul><li>Neighborhood Progress Inc . Founded in 1988, NPI restores Cleveland neighborhoods by providing investment capital and real estate development services to qualified Community Development Corporations (CDCs), along with operating support and capacity building. </li></ul><ul><li>Seedco . Founded in 1987, the Structured Employment Economic Development Corporation creates opportunities for low-wage workers and their families by engaging with community partners and anchor institutions to develop, operate and learn from model programs that help people join the workforce and achieve economic self-sufficiency , assist small businesses , and promote asset building for residents and businesses in economically distressed communities. </li></ul>© 2007 PRI Makers Network
    24. 24. MRI Overview <ul><li>MRI due diligence qualifies investment as acceptable for the endowment under Foundation’s Investment Policy. </li></ul><ul><li>Documentation should: </li></ul><ul><ul><li>Confirm that investment has been reviewed and approved under normal procedures required by the Investment Policy. </li></ul></ul><ul><ul><li>Confirm the mission objectives of the investment. </li></ul></ul><ul><li>The MRI segment is emerging; data and benchmarks are less evolved. MRI will be featured at Council of Foundations 2007 Conference in Seattle. </li></ul>© 2007 PRI Makers Network
    25. 25. MRI Recent Examples <ul><li>Bay Area Smart Growth Fund I, LLC, private equity fund formed investing in commercial and residential real estate projects in 46 low- and moderate income neighborhoods. </li></ul><ul><li>UrbanAmerica, LP, private equity fund investing in commercial real estate in U.S. low- and moderate-income communities. </li></ul><ul><li>Yucaipa Corporate Initiatives Fund I, LP, private equity fund investing in corporate partnerships that locate in, relocate to or expand their operations in U.S. underserved rural and urban communities. </li></ul>© 2007 PRI Makers Network
    26. 26. PRI/MRI/SRI Market <ul><li>PRI uptake slow in first four decades, despite success. </li></ul><ul><li>Interest increasing today due to range of factors: </li></ul><ul><ul><li>Recognition of scale in social sector programs; grant revenues not sufficient. </li></ul></ul><ul><ul><li>Empirical evidence that PRIs strengthen investee organizations while also extending philanthropic resources. </li></ul></ul><ul><ul><li>Continued strong PRI performance at large foundations. </li></ul></ul><ul><ul><li>Strong PRI performance as use increases by smaller foundations. </li></ul></ul><ul><ul><li>Decrease in market returns on endowments, intensifying focus on methods to extend resources. </li></ul></ul><ul><ul><li>Large contributions to endowment, effects of which can be smoothed with PRI strategies. </li></ul></ul><ul><ul><li>Business approach and increased involvement, consistent with a range of other philanthropic trends. </li></ul></ul>© 2007 PRI Makers Network
    27. 27. Social Return: Impact <ul><li>Fundamental questions for PRI investors: </li></ul><ul><ul><li>What are the tangible and intangible benefits on PRI for exempt purpose– social return on investment or “ROI”? </li></ul></ul><ul><ul><li>Are beneficiaries better served by PRIs plus grants? </li></ul></ul><ul><ul><ul><li>Field is still developing impact measurement systems. </li></ul></ul></ul><ul><ul><ul><li>Empirical evidence suggests important advantages, demonstrated by growth and effectiveness of organizations that use and recycle PRI funds to solve social problems, as well as increased resources for philanthropy. </li></ul></ul></ul>© 2007 PRI Makers Network
    28. 28. Social Capital Market Equilibrium © 2007 PRI Makers Network Subsidy Return Innovation and Impact Scale Supply of Social Capital Demand for Social Capital
    29. 29. Getting Started with PRI <ul><li>Developing and Vetting PRI Strategy: </li></ul><ul><ul><li>Coordination with Grants Program </li></ul></ul><ul><ul><li>PRI versus PRI/MRI/SRI Approach </li></ul></ul><ul><ul><li>Intermediary investing </li></ul></ul><ul><ul><li>Collaborative investing </li></ul></ul><ul><li>Setting up PRI Infrastructure </li></ul><ul><ul><li>Staffing and/or Outsourcing Functions: </li></ul></ul><ul><ul><ul><li>Deal Sourcing </li></ul></ul></ul><ul><ul><ul><li>Underwriting </li></ul></ul></ul><ul><ul><ul><li>Monitoring </li></ul></ul></ul><ul><ul><ul><li>Structuring (Legal) </li></ul></ul></ul>© 2007 PRI Makers Network
    30. 30. Getting Started with PRI: Intermediaries <ul><li>PRI examples and intermediaries exist to support range of community development needs: </li></ul><ul><ul><li>Land: Clean sites for development and greenspace. </li></ul></ul><ul><ul><ul><li>Acquisition Funds, Land Trusts, CDFIs </li></ul></ul></ul><ul><ul><li>Housing: Quality affordable rental and special needs housing and homeownership opportunities. </li></ul></ul><ul><ul><ul><li>CDFIs, Affordable Housing Developers </li></ul></ul></ul><ul><ul><li>Commercial Real Estate: Retail goods and services; facilities. </li></ul></ul><ul><ul><ul><li>CDFIs, CDCs, Smart Growth Funds </li></ul></ul></ul><ul><ul><li>Small Business Development: Financing and technical assistance. </li></ul></ul><ul><ul><ul><li>CDFIs/CDVC, Smart Growth Funds </li></ul></ul></ul><ul><ul><li>Human Capital and Asset Building: Quality affordable schools and childcare, workforce development, savings and asset building opportunities. </li></ul></ul><ul><ul><ul><li>CDFIs/development banks and credit unions </li></ul></ul></ul>© 2007 PRI Makers Network
    31. 31. Getting Started with PRI: Collaboration <ul><li>“ … .The second lesson of New Orleans is the need to understand when it is appropriate to act independently and when it is best to collaborate. And here I believe that if the philanthropic sector is to serve society well, it must, to whatever extent possible, prepare itself for greater collaboration. </li></ul><ul><li>The management guru Peter Drucker spoke several years ago about the emergence of a fourth sector in American society. We tend to highlight three sectors, a public sector driven by the ballot, a private sector driven by the market and a third or independent sector driven by voluntarism and the institutions of civil society. But Drucker pointed to a fourth sector where leaders recognize that the problems of our time are not only complex and interdependent, but of such scope and scale that we often need to form partnerships within sectors and across sectors in order to enhance our impact and effectiveness.” </li></ul><ul><li>James A. Joseph </li></ul><ul><ul><ul><ul><li>President Emeritus, Council on Foundations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Chairman, Louisiana Disaster Recovery Foundation </li></ul></ul></ul></ul>© 2007 PRI Makers Network
    32. 32. Questions and Follow-up <ul><li>GPS Capital Partners </li></ul><ul><ul><li>Lisa Richter </li></ul></ul><ul><ul><ul><li>626-318-1129 </li></ul></ul></ul><ul><ul><ul><li>[email_address] </li></ul></ul></ul><ul><li>PRI Makers Network </li></ul><ul><ul><li>Peter Berliner </li></ul></ul><ul><ul><ul><li>206-443-8430 </li></ul></ul></ul><ul><ul><ul><li>[email_address] </li></ul></ul></ul>© 2007 PRI Makers Network