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.