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Four Areas to Consider as You Dive into Program-Related Investing

This blog post announces the publication of a report produced by students writing for the Conservation Finance Network news team at Yale Center for Business and the Environment.

More and more foundations are turning to program-related investments (PRIs) to meet their goals. While grants still comprise the vast majority of philanthropic giving, foundations are getting creative about how to align their investments with their missions.

While each foundation does it differently, the successful ones are looking closely at their strategies for staffing, sources of PRI funding, ways to identify investable projects, and options for locating co-investors. Rather than starting from scratch when making these decisions, foundations should look to successful case studies and industry organizations to help ease their own transition to PRIs.

These are some of the key findings from a July 12 report,"How Foundations Can Use Program-Related Investments to Address Water Challenges," by Yale School of Forestry and Environmental Studies graduate students Allison Khoe and Susannah Harris.

The authors reviewed literature, identified major players in the space, and interviewed six key foundations about PRIs to produce the in-depth report. The document covers the current status of PRIs in the water space. It outlines barriers and opportunities. It also provides recommendations for future PRI development.

What Are PRIs?

PRIs are program-related investments made in nonprofit or for-profit organizations that receive below-market-rate returns. They should not be expected to grow a foundation’s endowment significantly, but they do provide repayment of funds that can then be recycled into new investments. They must support issues and projects that align with the foundation’s philanthropic mission.

How Can Foundations Follow the Path to PRIs?

There are many things to consider when moving from a pure grant-making strategy to a programmatic plan that includes PRIs.

Water-related foundations that are making a splash in the PRI space have been particularly thoughtful about these four elements:

1. Evaluate Staffing Strategy

PRIs can be made by either the programmatic staff or financial managers working with the endowment. (More often than not, these are two totally distinct teams within a foundation – or the endowment management is outsourced.)

The David and Lucile Packard Foundation, however, has a unique, designated staff focused on mission investing and is trained in creating investments for impact. This group is separate from the endowment team. The team members have deep knowledge in the social content of the work as well as the financials.

The Gordon and Betty Moore Foundation hired Dan Winterson specifically for PRI work. He manages the demands of pulling the foundation’s PRIs together by leveraging existing environmental-impact metrics from the foundation’s grants and focusing his time largely on thinking through the financial terms of the investments

2. Select an Appropriate Funding Source

PRIs are usually loans of at least $100,000 at an interest rate of around 1 percent, with terms ranging from around 3-10 years, according to Kim Elliman, president and CEO of the Open Space Institute. Some also function as convertible loans. They can take the form of loan guarantees, lines of credit, deposits (linked funds or cash), bonds, or equity investments.

Foundations vary on what pools of capital they tap into to make these investments.

For example, the Park Foundation pays for PRIs out of a fund separate from the grant budget. If staff used the grant budget, Executive Director Jon Jensen said, PRIs would “blow the grant budget right out of the water.”

The Gordon and Betty Moore Foundation, in contrast, does fund PRIs from its program budget. Other organizations invest in PRIs through a portion of their endowments while noting that the returns are not competitive with market-rate investments.

3. Identify Investable Projects

It is important for foundations to establish relationships with PRI recipients for accountability reasons, so many foundations chose to provide PRI loans to previous grantees or local organizations they know.

Susan Phinney Silver, PRI program manager at the David and Lucile Packard Foundation, confirmed that larger foundations are able to hire consultants to bring a list of investable opportunities to them. They attend major events or forums to network with people from various organizations. They are likely to be sought out by recipients based on name recognition.

An example of a foundation with a clearly delineated approach is the Skoll Foundation. Eric Cooperstrom, a principal on the Innovation Investment team, explained that his organization invests its PRIs in one of two groups - either financial intermediaries or social entrepreneurs who have already received grant funding.

Foundations with similar missions could consider sharing lists of possible projects to cut down on search costs.

4. Partner with Co-Investors

Many foundations are entering into PRIs in groups. These co-investors are able to pool their capital to have more of an impact. The foundation representatives also tend to designate a lead foundation to coordinate the PRI, which helps counteract the added time cost of administering PRIs versus grants. Foundations that are new to the space can use these collaborations to break into the PRI world.

One example of a collaborative investment is 2013 The Freshwater Trust (TFT) PRI. The $5 million investment provided growth capital to The Freshwater Trust to bring on more staff, purchase technology, and scale up its water quality trading program with an end goal of restoring river and stream quality. Three foundations contributed to the investment, including The David and Lucile Packard Foundation ($2m), Gordon and Betty Moore Foundation ($2m), and The Kresge Foundation ($1m).

How Can You Tap into the PRI Community?

There’s no need to start from scratch when getting a new PRI program off of the ground. In fact, there are numerous benefits to reviewing past examples of PRIs.

Case studies, like the ones provided in “How Foundations can use Program-Related Investments to Address Water Challenges,” provide insight into potential PRI partners, financial terms, and investable program types in the water space.

The Foundation Center also tracks macro trends, showing what water issues and geographies are receiving the most attention from United States-based foundations.

There are a number of organizations that are also worth contacting regarding environmental PRIs. The following organizations are designed to coordinate and scale action among foundations that care about water issues:

These organizations educate foundation endowment managers and investment officers on how to make foundation investments align as closely as possible to the foundation’s core issue areas:

What Can I Read to Learn More?

For more information on water-related PRIs, read “How Foundations can use Program-Related Investments to Address Water Challenges."

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