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A PRI Experiment in Austin Pushes the Social Capital Market Forward

By Nell Edgington



I am so excited I can hardly contain myself.  There is something pretty amazing going on in the world of philanthropy in Austin, Texas.   I have been talking for awhile about how PRIs (Program Related Investments) could be used by foundations in new ways to build the revenue sustainability of a nonprofit organization.

Just to recap, PRIs are loans that foundations make to nonprofits at low, or no interest.  At the end of the loan period (typically 2-3 years) the loan is repaid, or forgiven.  PRIs are usually used for capital projects or land purchases, among other things.  But they could also be used to increase the revenue-generating capacity of a nonprofit organization, through improved fundraising function or launch of an earned income enterprise.  The current economic climate seems like the perfect opportunity for this new use of PRIs when foundations are trying to hold on to their dwindling corpus while maintaining their past level of community support.

As I wrote in an earlier post here’s how it could work:

What if a foundation, or a wealthy individual, loaned a nonprofit $100K+ for a 2-3 year term.  Then, the nonprofit could use that capital to invest in their fundraising infrastructure in order to diversify and be more strategic in raising unrestricted dollars.  They could hire a seasoned Development Director, purchase a new donor database, upgrade their website and email marketing efforts, launch a major gifts campaign, train their board, and so on.  The idea is that all of these investments would pay for themselves in 2 or 3 years, at which time the nonprofit could pay back the individual or the foundation.

Well, the KDK Harman Foundation, an Austin foundation started by Janet Harman, who has been on the cutting-edge of Austin philanthropy before, just launched a PRI program to do just this.  According to their website:

KDK-Harman Foundation is seeking proposals from current grantees for Program-Related Investments (PRI) for its August and November board meetings…to (1) develop or expand their social enterprise efforts; or (2) expand their development and fundraising team. Although PRIs are used primarily for real estate loans for affordable housing or community facilities, the KDK-Harman Foundation will utilize PRIs to support loans to established, financially strong nonprofit organizations within the Foundation’s program areas to help grantees expand their scope of services and/or to become more sustainable. Specifically, the Foundation is seeking ways in which grantees could embrace social enterprise as a means to financial stability. Through a loan from KDK-Harman, the grantee could develop or expand its revenue generating operations and within three years repay the loan. Another example is to enhance the development team whereby the Foundation loans funds to hire additional fundraising staff. Within three years, the loan can be repaid through the additional funds raised. Over time, the organization should be much more financially secure with either a financially successful revenue stream or a larger development team.

I love it.  KDK Harman is doing two things with this new program.  First, they are increasing their ability to meet past levels of giving, despite any losses they might have met in the market, because the loaned money will eventually come back to them.  And second, they are encouraging nonprofit organizations to be proactive in creating revenue streams that will make them more sustainable.  Did I mention I was excited about this?

PRIs are used by other foundations (although according to the Foundation Center only a few hundred of the thousands of grantmaking foundations in the country use them), but I haven’t seen PRIs used in exactly this way before.  If you know of other examples of PRI programs elsewhere in the country that are used to increase a nonprofit’s revenue-generating ability, let me know.  But in the meantime, I’m so impressed with KDK-Harman. They are seizing the opportunity of challenging times to create a more sustainable nonprofit sector.


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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), 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.


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8 Comments to A PRI Experiment in Austin Pushes the Social Capital Market Forward

scott collier
July 17, 2009

KDK deserves cudos for their thoughtful move into PRI. The power of returned capital instead of lost capital is so significant that I continue to be surprised by how little PRI is done. Perhaps it is based on the fear that such a different way of deploying capital will somehow damage a foundation’s image or, even worse, its tax-free status. On that note it would be helpful if along the way KDK captures how PRI is working for them and in what ways they are overcoming challenges and concerns.

Nell Edgington
July 20, 2009

Absolutely. I think it would be great if we could all learn from what KDK Harman discovers in this experiment!

Patsian
July 21, 2009

Would PRI not also encompass the crop of social investors that have come up? Mostly they are equity investors and seek social + financial return – which may have travelled a bit further on the risk-return spectrum than most investee targets are comfortable to commit to. PRI in the form of a loan, with or without interest, can be a great addition to the funding options available – in the form of re-usable capital. How do you suppose PRI operators should evaluate or measure the risk of “lending” money rather than “granting/investing”? Thanks for posting this!

Nell Edgington
July 21, 2009

It seems to me that the risks of PRIs are equal to, or less than, a traditional grant because there is a possibility with a PRI that the money will come back. So the financial risk is less. And, ideally, the social impact risk would be the same as a grant because a foundation should do the same due diligence for a PRI (on the organization, its management, its past results, its plans) that they would do for a traditional grant. I honestly don’t understand why more foundations don’t do PRIs, but I would love to hear thoughts from others about the downside and risks of PRIs.

Elizabeth U
August 5, 2009

My experience is that there is a growing number of foundations that are interested in making loans to social enterprises, but that this interest isn’t translating into action… yet.

A major barriers to entry for smaller foundations (and by that I mean foundations with relatively few staff) is that they often lack the expertise and internal systems to find eligible PRI candidates, perform the necessary due diligence, draft term sheets, administer the loan or investment over time, and provide technical assistance to the borrowers. These skills and systems are quite different from those required to make and track grants.

It was precisely because of this challenge (and because we heard from so many foundations that were interested in such a model) that we launched the RSF PRI Funds. Rather than doing PRI directly, it can be really helpful for foundations in the situation above to use RSF as a PRI intermediary, taking advantage of RSF’s 25 years of experience in social enterprise lending.

Nell Edgington
August 6, 2009

That’s a great service RSF is providing foundations and the nonprofits they fund. Hopefully you will find a great demand for your help with PRIs, and they will become more prevalent.

Rick Zwetsch
May 14, 2012

Hey Nell,

Is KDK Harman still doing PRIs? I haven’t read every wordof their Web site but I don’t see any mention of PRI.

Do you know of any other foundations making PRIs?

Hope all is well!

Best,

Rick Z.

Nell Edgington
May 15, 2012

Rick, I don’t know if KDK Harman is still doing PRIs, they may not be. It might be worth a call to them to find out. Many foundations use PRIs, and I think that number is increasing. Any foundation can do it, it just takes some additional administration, which they may or may not be willing to do. I would encourage you to talk to those foundations who are already supportive of your organization and ask them if they might consider a PRI next time. Good luck!

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