Scott: While the financial analysis you offer at the end of your post is accurate, it neglects a critical consideration. What if grants prove to have a much greater social impact than PRIs? What if grants allow nonprofits to do things they simply would not do under a PRI scenario? While doing more PRIs and fewer grants will surely improve the financial bottom line of a foundation, the objective of a foundation is not wealth accumulation. Instead, the objective is social impact in a chosen mission domain. For this reason, we need to know what the expected social return would be of grants versus PRIs before declaring PRIs to be universally valuable additions to the portfolios of foundations. Since we don’t know the social rate of return of either grants or PRIs (or at least we can’t measure it with the same precision as pure financial returns), we really can’t arrive at the conclusion you offer. The asymmetry in precision between financial and social return measurement ultimately makes it impossible to know whether a pure grants or pure PRI or even a mixed approach is best. It all depends… on which approach has the most significant social impact. And we don’t know that, sadly.

My point is not that PRI should replace grants completely, but that the PRI + MRI experiment should be run, at least by foundations that seek to enable sustainable models of development. Here are a few reasons:
1. Lending money can create a healthier dynamic than granting it. Give me something, especially repetitively, and I become dependent. Lend me the funds to build a business and my work will generate the funds to repay you. Lending is partnership not charity: both parties gain something from the transaction. There certainly are situations that will continue to call for grants or emergency aid, but bottom-of-pyramid studies I read indicate that what developing world societies want is access to capital more than handouts. Don’t give me a fish and don’t teach me to fish – enable me to build a fish farm where I own the pond.
2. Lending money can generate significant social impact. Muhammad Yunus discovered this in 1974 when he lent out $27 and ended up creating the microfinance industry that today is credited with having improved the lives of over 100 million poor families. And microfinance is just a single type of social business – evidence, if not proof, that the investment approach can have dramatic impact.
3. By lending money rather than granting it, the returned capital can be redeployed. Even if a given level of PRI funding creates a lesser impact than the same dollars given as a grant, the loan comes back to be redeployed. As a simple example, if you loaned the money just once then granted the returned capital you have increased impact generated by those dollars over the case where you just granted them in the first place.
4. Because the PRI has a financial return much better than negative 100% it frees up the foundation to engage in Mission Related Investing that generates little to no return. The example I gave produced an improved aggregate financial return, but if we agree that the point is not to improve financial returns then the obvious answer is grant more money or do more PRI or MRI. So in that case, maybe even 8 or 9 percent of total assets end up getting deployed for impact. Even if the investments produce less impact dollar for dollar than outright grants, there are substantially more dollars in play and I expect impact would be increased dramatically.

Scott, I think this is a worthy challenge you lay out. There is a robust debate going on about how to get foundations to be more aggressive in spending down their resources without doing so hastily or without regard for measurable impact. PRI and MRI provide an excellent outlet to defray the “loss” associated with additional grants while putting more of the foundation’s resources to work toward the ends that the foundation exists to further. It is odd that foundations bifurcate their investments and program grants to the extend that they do, because, as you say, a strategic investment often produces far more effective and sustainable impact.

I think some of the reason that PRI and MRI are strangely underrepresented in foundation strategy has a lot to do with what people expect out of philanthropy, though. As Peter Frumkin has written: “At its core, philanthropy is about expressing values, not outcomes. Philanthropy is a vehicle of speech.” I found a paper by the Monitor Institute, titled “Why Donors Are Not Investors, (http://www.futureofphilanthropy.org/files/donors.pdf) helpful in helping me understand why arguments to think about investment don’t take hold among foundations as it seems they should.

To Peter’s comment: Indeed, investment is not always the best option. But organizations can make this decision rationally, as the Acumen Fund does with its “best available charitable option” (http://tinyurl.com/ocb7lt) assessment that it always runs before making an investment. While charitable models do in some cases come out on top, depending on the desired outcome, they face some high hurdles. Bill Gates identified the biggest advantage that investments have in his latest letter on behalf of BMGF: “…running a foundation is not like running a business [in] that you don’t have customers who beat you up when you get things wrong or competitors who work to take those customers away from you… This lack of a natural feedback loop means that we as a foundation have to be even more careful in picking our goals and being honest with ourselves when we are not achieving them.”

Some great insights Josh and thanks for the link to the Monitor Group paper. It does a great job of arguing that philanthropic donors act more like customers than investors, a situation that can lead to some confusion and even dysfunction. However, the first footnote in the paper points out that one exception to this situation is the subset of foundations that make Program Related Investments.
As to the Gates comment, he is dead wrong when it comes to Program or Mission Related Investments. These financial instruments and the social enterprises that they support are market-based and therefore do have intact feedback loops with customers, suppliers, competitors and other stakeholders. As in the for-profit business world, over time some social enterprises will succeed, some will hobble along and others will fail and they all will have varying degrees of success against their impact objectives. What they will all share is that their success will be tied to how well they serve the needs of their base-of-pyramid customers and stakeholders against a backdrop of their respective competitive landscapes. Again, my point is that this experiment deserves to be run as it could be the breakout play that some foundations are seeking. Innovative foundations such as Rockefeller, Skoll and Omidyar are making some strides here, so hopefully others like BMGF will follow suit.

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