Program-related investments (PRIs) are a powerful tool that allow private foundations to channel grant money to social enterprises for use as seed capital. PRIs can be used support forward-thinking innovation in nontraditional models across a variety of issue areas.
While PRIs have received some attention, what many foundations have yet to explore is how PRIs can be an excellent choice to spark and scale new ideas existing in social enterprises–to find and test groundbreaking work coming out of some of the most promising teams in the country. We can help private foundations start and scale PRIs in ways that are simple to start and administer.
The fundamental case for PRIs is this: The world has a lot of problems that we want to solve and social enterprise may be the answer to some. Despite well-intentioned efforts, our traditional tax-exempt model has only offered incremental change. By increasing the flow of capital to social enterprises through PRIs, we hope to create monumental, exponential change.
While more widespread use of PRIs is new, the tool itself isn’t. PRIs have been a legally-available option for foundations since they were written into the tax code in 1969. While they have slowly gained momentum since that time, their popularity has snowballed in recent years. We are glad to see more foundations using this approach, and we are uniquely positioned to assist with new and expanded PRI initiatives.
As a legally-defined vehicle (unlike more general, non-regulated categories like “mission-related investing” and “impact investing”), PRIs, particularly the more complex and innovative ones, require seasoned PRI legal experts and consulting professionals to insure the transactions are done properly and that compliance conforms with the law. The good news–we’re here to help, and it doesn’t have to be overly complex or time-consuming.
If you’re a foundation looking to move into PRI-making or grow an existing PRI program, we’d love to help you!
What we like about PRIs. PRIs are a grant alternative. Historically, they have most commonly taken the form of low- to no-interest loans or below-market equity stakes, although virtually any financial vehicle is possible. Private foundations have to pay out 5% of their net assets each year to mission-aligned causes. They can meet this in two ways: grants and PRIs. As an alternative to straight donations with no possibility of reuse, the foundation has the option to structure some or all of that same amount as a PRI. In so doing, the foundation has the possibility of getting the money back, plus a reasonable rate of return. As a bonus, this structure helps grow the amount of money the foundation uses for mission-aligned causes.
Most importantly, PRIs provide startup social enterprises with capital they might not otherwise get from traditional investors, who often expect market-rate returns and extensive track records, and have little concern for the mission. PRIs allow time to test the model in the real world, try new solutions, ramp up operations, and ultimately become self-sustaining enough to attract market rate capital at a later stage to power growth.
PRIs are designed to support organizations that don’t fit a traditional nonprofit mold – organizations that need a different kind of fuel to light a self-sustaining, scalable kind of fire, but that aren’t profit-prioritizing enough to attract or warrant the burden of venture capital. PRIs combine the heart of a grant (the impact-focused, mission-aligned do-gooder) – with the spirit of venture capital (the risk-taking, hopeful, and optimistic trailblazer).
Any size foundation–big or small–can participate in PRIs. You don’t need a colossal endowment, and you don’t need a large team to implement them. PRIs can also be a powerful mover in leveraging community capital. In geographic or issue-focused communities around the country, like-minded foundations can join together to start PRI pools and commit to tackling an old problem in a new way. By banning together to fund ideas that get your community excited–that have the ambition and the potential to scale around the country or around the world–you may just inspire other foundations and local investors to follow suit.
Why PRIs are Important. Before we can fully appreciate why PRIs are important, we need to understand why for-profit social enterprise itself is important. There’s a growing awareness in the social sector that the tax-exempt nonprofit model isn’t adequately designed to solve all of our most deeply rooted social problems. There are many reasons for this, including that tax-exempt nonprofits must follow strict legal rules governing how they operate. As Michael Shuman, author and Cutting Edge Capital fellow, notes–“there’s a very good argument that many of the attributes of typical nonprofits – heavy reporting requirements, self-reappointing boards, poor access to capital, awful labor standards (the in the name of the public interest) – make them lousy vehicles for social change…I think we need to rethink the structure of do-good enterprises.” As we’ve evolved as change makers, and as modern technology has expanded our worldview dramatically, we’re still faced with a prevailing notion that encourages us to box our ideas into a model that was never designed for growth or risk-taking. The solution, then? For ideas intended to innovate and scale–shift the paradigm.
Types of PRIs. Loans, to equity, and everything in between! There’s no “one size fits all” PRI. The question we advise foundations to ask is “What does the social enterprise need, or what are they asking for in the context of their current raise?” The answer is usually where to PRI conversation should start. The specific type of financial vehicle used should be relevant in context but doesn’t usually affect whether funding counts as a PRI or not. We can assist you in structuring an investment that best meets your organization’s goals.
How we help. Cutting Edge Capital wants to make the process as easy and hassle-free as possible. We provide a variety of legal and consulting services to help you every step along the way. With our unparalleled PRI expertise, you can rest assured you’re getting trusted, specialized service.
- Board, executive, and staff education – If PRIs are a new concept for your organization, or if you need assistance presenting to the board or getting new PRI processes or programs on track, we’ll help educate the appropriate personnel and get the program in place.
- Single PRI transactions – When right opportunity comes along, we’ll help you with whatever you need to get the deal done. This can include front-end expenditure responsibility (IRS information gathering requirements), PRI strategy, structuring, and negotiation, the transaction deal documents themselves, the PRI opinion, backend monitoring and evaluation, and anything else on this list. We handle the transactions from start to finish.
- Setting up a PRI program – While a full PRI program or portfolio isn’t necessary to participate in PRIs, it does provide a wider platform enabling even greater impact. We can help you craft one. We will provide you with all the education, legal advisement, policy development, process management, operational integration, due diligence, and transaction work associated with each recipient that is appropriate for your specific program.
- Program and process management – No matter your size or structure, we’re committed to making the process as smooth as possible–dare we say, even fun. We work alongside foundation staff and teams to integrate PRIs seamlessly into your existing framework.
- PRI policy development – We usually recommend having a policy in place that governs how the board and staff review, approve, and pay out PRI funds. We’ll help you draft and adopt one.
- 990 reporting – PRIs are required to be reported on your annual 990 and we can work closely with you and your tax advisor to help you prepare for that reporting.
- Backend process management – PRIs require a little extra oversight, but we’ve got you covered there too. We’ll help you understand what reports you’ll need from recipients and when, provide you with templates, and even remind you when they’re due.
- PRI Recipient Introductions – One of the most common hold-ups to PRI making is the lack of high-potential recipients making it on to foundations’ radars. At Cutting Edge, we and our partner organizations continuously work with social enterprises pushing fresh ideas and innovative business models embodying the issues many foundations care about. Let us help you make connections.
A note for foundations on the PRI fence. If you’re interested in PRIs as a future step, but not sure if it’s the right time, let’s start a conversation. It may even be helpful at this stage to adopt a mindset of simply being prepared for PRI-making when a promising social enterprise comes along.
A Note on program-related investments (PRIs) vs. mission-related investments (MRIs). Note that PRIs are different from mission-related investments (MRIs) and impact investments, which are generally pulled from the endowment and legally required to expect market-rate returns in order to grow the net worth of the foundation. Further, while highly touted in the media, MRIs and impact investments are generally made to the same types of companies and issue areas – only those that have been time-tested to prove they can generate respectable returns (sustainable farming, CDFIs, funds, etc.). Not to game-changing new ideas.
On the other hand, PRIs are not intended to grow the foundation’s worth, but rather to provide a more functional and necessary (even regenerative) vehicle for funding charitably-grounded organizations with self-sustaining and scalable potential. Some of the most influential foundations in the country do them, and have continued to do more of them over the last few years, with nothing but praise for the tool.
“PRIs allow us to tackle problems we couldn’t tackle before.”
-Bill and Melinda Gates Foundation
A Note on Focusing on the Right PRI Outcomes. PRIs are a chance to spark a new idea, to give potentially world changing idea wings to take flight. A grant does not have the potential to return to the foundation. PRI risk and return therefore might not, and arguably should not, make it to the top of a PRI conversation (reminder: grant alternative). While payback of your money eventually should be expected, the financial return is better thought of as a bonus.
To better appreciate this concept, it may be helpful to take a step back and revisit what PRIs are not–not a grant and not a traditional investment (the former of which, for our purposes here, includes MRIs and impact investments mentioned above which, under the law, are no different than regular endowment investments). PRIs are actually a legally distinct third option – albeit more akin to grant rules than investment rules. With Cutting Edge Capital’s experience, we will easily partner with you to bring the right balance of social goals, performance indicators, and financial outcomes back into focus, and put any anxieties and fears to rest.
Are you a social enterprise interested in PRI funding? We can help you in different ways. Don’t hesitate to reach out about PRI strategy consulting services we offer, as well as other legal components that may help your appeal for PRIs to foundations. Request a complimentary consult.