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PRIs: Another Part of the Emerging Social Capital Market

By Nell Edgington

Continuing the various discussions about the beginning signs and formations of a social capital market, I’d like to add PRIs (Program Related Investments) to the conversation.  In all of the concern about decreasing philanthropic giving because of the economy there has been little talk about these financial vehicles as a real opportunity for foundations, and a potential social capital tool.  A PRI is basically a loan made by a foundation to a nonprofit at a low/no interest rate. The loan is made out of a foundation’s normal 5% minimum payout requirement.  However, because it is a loan, the foundation eventually gets this money back to be regranted elsewhere.

I wrote a few months ago about how foundations could use PRIs in a new way to invest in increasing a nonprofit’s fundraising function (new development staff, new technology, training, collateral, infrastructure, etc).  The PRI investment would be paid off in a few years and the nonprofit would be left with an elevated revenue generating engine. So the foundation’s investment has a pretty impressive return: the principal plus interest is returned to the foundation and, in addition, the nonprofit that they were supporting is now able to generate annual operating revenue at a much elevated rate, bringing them that much closer to sustainability.

It seems to me that now is the perfect time to institute this new use of PRIs for several reasons:

  • Foundations have decreased funds with which to invest, so the further they can stretch their money, the better
  • Nonprofits need to be smarter and more strategic about raising money in an increasingly difficult economic climate, so investments to help them do that would be very helpful
  • The nonprofit sector lacks access to capital for capacity or infrastructure projects like this, so these investments would expand that capital pool

I was encouraged to see that RSF Social Finance recently noted an increased interest among grantmakers in PRIs, especially given the financial market conditions.  In their eyes, PRIs are a real opportunity:

Now more than ever, PRI offers foundations a unique opportunity to respond to the challenge of using fewer resources to provide support to communities with greater needs. Organizations  that were already  promoting PRI as a means for foundations to support their missions are now upping the ante. “As we know, the turn of 2008 to 2009 caught many foundations by surprise,” says Dana Lanza, Executive Director of the Environmental Grantmakers Association. “Within the environmental grantmaking community, assets are down by an average of 30%-40% in many cases. We are noting that in this climate, PRI is garnering significant interest from our members as a means to continue to support innovative efforts while essentially ‘recycling’ funds. I expect this to become a critical form of grantmaking as we pull ourselves through this rough period over the next few years.” The PRI Makers Network, which provides a wealth of resources and data related to PRI, organized a call last month for funders to discuss the results of a recent member survey: PRI in Tough Economic Times.  The survey revealed what callers confirmed: while there are reasons to be cautious, there are even more reasons to seize the opportunities inherent in PRI. According to the survey summary, “last year, in many cases, PRIs constituted [foundations’] highest performing asset class – providing downside protection in the bear market.”

So RSF Social Finance is launching the RSF PRI Funds which allows family foundations to invest at least $250,000 into a pooled PRI fund.  RSF handles the terms and deal sourcing and invests the PRIs into organizations in three areas: food & agriculture, education & the arts, and ecological stewardship. As RSF Social Finance puts it: “Our pooled PRI model means that each foundation’s investment will work alongside other funds, re-invested into a portfolio of borrowers doing critical work on the ground. This approach maximizes the power of leveraged PRI impact while also mitigating risk.”

It’s an interesting idea.  I’d like to see more foundations using PRIs in innovative ways.  I think PRIs are an underused financial tool available to the social sector.  They could be used to help nonprofit organizations increase their capacity, their revenue generation function, their infrastructure and perhaps even help them scale.  It is just another piece of the social capital market that is yet to be developed.

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About the Author: Nell Edgington is President of Social Velocity (, a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.

Thursday, April 16th, 2009 Financing, Foundations, Social Investing

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17 Comments to PRIs: Another Part of the Emerging Social Capital Market

scott collier
April 16, 2009

PRI makes so much sense: create the intended social impact and get the money back to do it again. Equivalent to the venture capital investing notion of getting your bait back. The asset management side of the foundation works hard to equal or exceed average market returns, and in a year like 2008, as Lanza points out, even that results in substantial losses. So then when it comes time to deploy capital it seems to be wise, at least with a portion of the spend, to make a social investment that stands a good chance of returning the capital deployed rather than a social grant which will by definition be a negative 100% return. Even to put a nominal interest rate on PRI money seems relatively meaningless – is there really that big a difference between a 100% return of capital and getting a few points of yield on top of that? Especially when the rest of program money is returning negative 100%, again, by design? Thanks for keeping the conversation going. Perhaps soon you could share your views on Mission Related Investing?

Nell Edgington
April 16, 2009

Yes, if we could get foundations to start thinking about investing their corpus (the 95%)in social innovations that return BOTH a financial profit and a social profit that would be huge. That would drastically increase the social capital market. Yes, definitely a blog post on that in the works. Thanks Scott.

Tony Wang
April 16, 2009

I once talked to Martin Fisher of KickStart who said that as a nonprofit (even as an earned income nonprofit who works in the developing world), PRIs DON’T make that much sense because at the root, nonprofits need grant capital – if you give a PRI today, then someone else will need to give a grant tomorrow to repay the PRI made today. (And explaining to future donors that you need to pay off a PRI may be a somewhat awkward situation). Though, Martin admitted that PRIs as a short-term financing gap (as they’re often used in conservation easements) that accelerate access to finance to smooth out business cycles make some sense.

PRIs to for-profits are a different story, and there’s a variety of reasons of why foundations aren’t investing their corpus or implementing PRIs. I had a conversation at Hewlett last week where Jacob Harold, a program officer in the philanthropy program, explained to me that as a program officer, there’s a disincentive to make a PRI because it takes a significant proportion of a program officer’s grantmaking budget and carries a lot more risk of failure. Furthermore, although Jacob went to business school, most program officers are unable to evaluate the business opportunity in for-profit PRIs.

Paul Brest, the President of the Hewlett Foundation, said that the institution and board’s policy has always been to keep its grantmaking and its investment policy separate – similar to the Bill & Melinda Gates Foundation. Though I’m a big supporter of mission investing (and gave him an example of a mission investment that would truly generate positive financial and social return), Paul said that if an investment opportunity truly represents a market rate of return and produces social benefit, then you should be able to convince a foundation’s investment team to make an investment into your organization irrespective of the social benefit. The problem isn’t on the foundation side – it’s actually more on the intermediary side. We need more venture capitalists and more investment professionals who can sell to institutional investors new funds that focus on double bottom line ventures that don’t compromise on financial return. Hewlett would be happy to invest in competent finance professionals, but it can’t manage the deal flow of trying to finance every single social entrepreneur who wants an investment.

Nell Edgington
April 17, 2009

Lots to respond to Tony. Thanks for writing.

Ok, first, I disagree with Martin Fisher and think his view of how nonprofits are financed is pretty limited. First of all, not all nonprofits are grant funded. Rather, we need to take a much larger view of a nonprofit’s overall revenue engine. I would argue a healthy nonprofit organization gets its revenue from varied sources, not just foundations, and if a nonprofit can strengthen their revenue function (hire a seasoned fundraising professional, launch an earned income stream, start a major gifts campaign, look at corporate sponsorship, and so on) because of a capital investment by way of a PRI, that would pay tremendous dividends. The nonprofit isn’t asking a foundation to repay the PRI, rather, they have taken their revenue function to the next level by way of an investment loan. How is that any different from a business taking out a loan to strengthen their product, their distribution channels, their sales force, etc.? If the end result of the capital infusion is to make the organization stronger, more effective and more sustainable isn’t that worth the investment? My argument is that PRIs provide another necessary tool to give nonprofits more of the financial vehicles that for-profits enjoy. I think Martin’s view is too simple.

On your second point, for-profit PRIs, I’m not familiar with these. My understanding of PRIs is that they have to come out of a foundation’s 5% requirement, therefore they have to go to nonprofits. But if you have examples of for-profit PRIs please let me know.

Finally, on your third point about mission investing, I agree that if an investment offers a market rate of return AND social benefit, a foundation would, of course, invest. What I think is more interesting is investments that offer a below market rate of return AND a social benefit. Why does a foundation need to put the entire corpus into full market rate return investments? Couldn’t a portion of the corpus go into blended value investments that meet some rate of return, but also fulfill their social objectives as well? There aren’t going to be enough blended value investments that offer a market rate of return (at least not yet), so why not take a portion of the corpus and invest it in lower return, high social return investments? It seems to me that these lower return investments take the overall goals of a foundation that much further and provide a lot more social capital to the marketplace.

Tony Wang
April 17, 2009

Hi Nell,

I think people can reasonably disagree on these points – but I’d like to continue the debate and see at the end of the day where we stand on these issues.

Re: Martin Fisher – I hadn’t thought about the need for upfront capital to finance a fundraising campaign. I think that’s a good example of nonprofits not having enough access to capital, but I don’t understand why nonprofits would need access to subsidized capital from foundation PRI budgets. From a governance and accountability perspective, it would be better to have a revolving loan fund that doesn’t sacrifice on returns, which could then tap into traditional capital markets. By calling for subsidized capital, my worry is that we ultimately limit the amount of capital nonprofits have access to, and we have little way of accounting for the charitable impact of the subsidy itself.

Re: For-Profit PRIs

I’ve been doing a lot of reading on mission investing and PRIs – and there is indeed a rich history of PRIs and investments in for-profits. Here’s a couple of reports (the second and third ones talk more about the IRS’s history in private letter rulings on PRIs) you might find interesting:

Re: Below Market Rate of Return and Social Benefit

There’s a unique challenge of making below market rate of return investments, which is justifying why the investment is below market rate. I don’t believe in below market rate of return social ventures because they are 1) often below market rate due to inefficiency and 2) it creates significant transaction costs on the funding side (there’s few people in the world who have expertise in analyzing both social and financial return, and those who do both usually aren’t the best at both). I wrote a post related to this topic from my then recent experiences in China working with a social enterprise, some of which is still relevant today:

And for most of the social ventures that operate in that weird for-profit but not market rate of return space, it seems that better business model design, strategy, and design could lead to market rates of return. In fact, if we forced all for-profit social ventures to generate market rates of return instead of offering them the crutch of subsidized capital, I think that would help the field become more efficient.

The call for below-market rate of return loan and equity instruments and L3Cs is something that I am desperately afraid of becoming widespread – which I think is unusual for someone in the social enterprise space – and it’s something I hope to further clarify in a post after my next one.

Nell Edgington
April 17, 2009


I’m all for a good debate, so keep it coming!

Regarding your revolving loan fund idea, I don’t see it. I think a nonprofit would be hard pressed to find traditional capital that would provide a loan for a fundraising upgrade. How does using a PRI for this effort limit the available capital nonprofits have? If anything, I would say it broadens the capital they have available to them. I think the ideal of nonprofits being able to access traditional capital markets to secure loans for these activities is a great one, but we’re not even close to there yet. In the meantime, why not use PRIs for this purpose?

Thanks for the links on for-profit PRIs, great info.

Now, regarding market rate of return and social benefit. I see your point #2, that there are few people in the world that are expert at analyzing both social and financial return, but it seems to me that that is more a function of the newness of the blended value space, rather than a reason to dismiss below market social ventures out of hand.

It seems to me that your underlying assumption in your comments here and in the blog post you link to is that all social ventures are capable of attaining market rates and any inability to do so is because of their own inefficiencies. Isn’t your assumption there that the market is purely efficient? That the market can not only provide financial return but also public goods? Isn’t the very definition of a public good that it is not accessible by the market? Therefore, there are always going to be some social problems that can’t be solved by a market solution. Do you relegate all of those problems to philanthropy then? Is there no gray area where a problem can be solved by a blending of market forces and philanthropy. To me, that gray area holds the most promise.

Tony Wang
April 17, 2009

All great points Nell. I have some deadlines to make this afternoon and our readers may be looking for some resolution, so here are some closing remarks to put the debate in perspective.

1) Should nonprofits receive subsidized loans, in particular through PRIs?

I’m all for nonprofits receiving loans, but I think we should avoid PRIs because they’re complicated and not very easy to implement from the funder’s side (as a financial instrument, they’re very inefficient). Instead, I think better valuations of nonprofit loans vis-a-vis better risk models that make nonprofit loans competitive with other financial instruments in its asset class would be better. The analogy is instead of funding microfinance through PRIs, let’s focus on understanding how to better securitize microfinance to make it mainstream, or in this case, better securitizing nonprofit loans.

2) Should we combine charity with business?

I don’t believe the market is efficient, but I don’t think the solution is to combine the creation of private goods (supplied by for-profits) with the creation of public goods (supplied by government and nonprofits) into social enterprises. There’s little evidence to suggest that the combination of private and public goods is necessary to improve the provision of either – and there are all sorts of governance challenges related to social enterprises specifically (Larry Summers’ criticism of government sponsored enterprises like Fannie Mae and Freddie Mac still rings relevant). Furthermore, by making more below market rate of return loans, I also worry about the counterfactual – that instead of giving capital to more efficient businesses in the traditional markets, who don’t use the language of double-bottom line businesses, we’re misallocating capital to more inefficient businesses and social entrepreneurs who really don’t know that much about running a business to begin with.

3) The standards of excellence should be set high.

I think social innovators and social entrepreneurs would do well to think, “How can I generate market rates of return or better and have an incredible social impact?” What we should be focusing our time and energy on are the for-profit ideas that are so good that they scale (like Google, which has irrefutably generated immense social good) – or the nonprofit ideas that are truly public goods. To me, that gray area of “it’s ok to not generate market rates of return” represents a gray area of inefficiency and lack of accountability. I believe social innovators and entrepreneurs could do better if they didn’t let themselves settle for subsidized capital and held themselves to higher standards.

Nell Edgington
April 17, 2009

You make great points, Tony, and I’ve enjoyed the debate. However, I still disagree with your delineation between what you call social entrepreneurs and social innovators (and assume that they are only for-profit in nature) and nonprofits. Is the assumption that good nonprofits only provide public goods? What about nonprofits that are also subsidized social enterprises? Does the mere fact that they are subsidized make them inferior or less efficient than a market-based cousin of theirs? What if such a cousin simply couldn’t exist because they couldn’t find market-based revenue to survive? I think by focusing on “the for-profit ideas that are so good they scale” and the “nonprofit ideas that are truly public goods” you are leaving out a whole category of social innovations and solutions, simply because they don’t fit neatly into one of those two categories. I think it’s a too limited view of social innovation.

scott collier
April 17, 2009

Terrific discussion here with some valuable insights.
Re: Martin Fisher: I see valid points on both sides in the given context, but what about PRI directed to non-profits that will have zero dependence on grants? I am talking here about social businesses: to be clear 1. “companies that focus on providing a social benefit rather than on maximizing profit for the owners, and that are owned by investors who seek social benefits” or 2. “Profit-maximizing businesses that are owned by the poor or disadvantaged.” (quoted from Creating a World Without Poverty by Yunus). These ventures are well suited to receiving an injection of patient startup capital with a 3-7 year payback expectation. This is social venture capital: an ideal role for PRI money.
RE For-profit PRI: Interesting. I will dig into this as I too assumed PRI investing in a for-profit would be off limits. Thanks for the links.
RE Return vs. Social Benefit: This area needs a lot more discussion and debate as I see unrealistic expectations being set that could have a negative overall impact on social investing. Generating a market return by investing in small businesses is no easy thing. After 18 years in venture capital and going through a couple major financial cycles, even with 100% focus on maximizing returns, I have seen businesses go belly up generating a total loss to shareholders. I have also been fortunate enough to be in deals with returns of greater than 20X to shareholders. The point is that the goal of all these was the same, to maximize financial return, and huge effort and capital was expended to do that only to see it sometimes work and sometimes fail. If in these deals we had to strive for positive social impacts in addition to the competitive concerns of the marketplace I am confident that we would have had to compromise at times. Yunus does a better job than I at arguing the “you can’t serve two masters” point so I will just say I am in agreement with him. I am not a big fan of the “double bottom line”. We would do better to set the expectation at foundations that MRI investing will produce below-market returns, not because of inefficiency or a confused mission, but because in all business decisions the recipients of the MRI capital will be focused on achieving the social mission in a sustainable way but NOT a way that maximizes profit or return to investors. By establishing this low or even zero return expectation (but still much better than negative 100%!) we can then have honest dialog between foundations and investees about the degree of social impact this new category of investment can have without it being clouded by missed return expectations.

Nell Edgington
April 17, 2009

Great comments, Scott. I agree with you on all. Thanks for joining the discussion!

[…] Related Investments: Nell had an excellent post on this topic.  Deployed as loans at below-market yields, the risk-adjusted returns over time […]

[…] nonprofits (which he calls charities) versus social businesses. Tony and I have sparred before on PRIs and mission-related investing, and I had to take up the cause again with his argument that poses a false […]

[…] the use of program-related investments (PRIs) to include capacity building projects like upgraded nonprofit fundraising […]

[…] Related Investments: Nell had an excellent post on this topic.  Deployed as loans at below-market yields, the risk-adjusted returns over time […]

[…] great ideas, giving seed funding for ideas that have potential, using mission-related investing and program-related investments, working as a group to discuss innovations in philanthropy and share and leverage […]

[…] the use of program-related investments (PRIs) to include capacity building projects like upgraded nonprofit fundraising […]

[…] nonprofits (which he calls charities) versus social businesses. Tony and I have sparred before on PRIs and mission-related investing, and I had to take up the cause again with his argument that poses a false […]

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