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What The Heck Is Program Related Investing (PRI) and Why Should I Care?

sign reading "next big thing"

Program Related Investing (PRI) is the Next Big Thing in Philanthropy. The potential is completely untapped. Let’s break it down. About 10 years ago I heard about PRI for the first time. The Community Foundation for which I worked  dipped it’s toe into the PRI world when it began making below-market loans to charities for capital projects. PRI isn’t just loans. It encompasses many different types of investing with a purpose. It’s a fascinating area that I’m just now beginning to learn more about.

The thing I like most about PRI is that it gives charities an edge in financial markets that isn’t available from traditional funding channels. It allows them access to capital at ULTRA-favorable terms. If more PRIs were available, charities would never have to go to a traditional funding source like a bank to secure capital ever again! 
image of Jeff Ochs
I recently sat down with PRI expert and founder of the Venn Foundation, Jeff Ochs. (He’s also a Trekkie like me!) He opened my eyes to so many aspects of PRIs that I’d never considered before and I just HAD to share it all with YOU! Venn is a brand new Donor Advised Fund provider in the Twin Cities. They devote 100% of their efforts towards making PRI available for donors to fund and for charities to receive.
I find this really interesting, for so many reasons – one of which is the ability for a donor to contribute money that will be used over and over again for several charitable causes. It’s like recycling money!

Jeff, I find Program Related Investing fascinating, but I’m by no means an expert like you. How would you describe PRIs to someone who has never heard that term before?
Program-Related Investments (PRIs) are a special type of investment that private foundations and public charities can make to advance their charitable missions. To qualify as a PRI, an investment must meet two main requirements:
1. The Primary purpose of the investment is to advance the organization’s charitable purpose.
2. The financial terms of the investment are in some way “below-market.”
PRIs are quite versatile. As long as each PRI meets the two main requirements above, PRIs can be structured in any form (equity, loans, etc…), made to any type of recipient (nonprofits, businesses, social businesses, government, and individuals), and used to advance any IRS charitable purpose.

What are 2-3 things you think every nonprofit should know about PRIs?
1. Wherever your nonprofit is currently interacting with market-rate financial products (mortgages, lines of credit, etc…), there is an opportunity for PRI financing on much better terms.
2. Imagine that a philanthropist offered your nonprofit up to $500,000 in PRI capital and suggested that you could write the financial terms as long as there was a chance for return of principal.  What ideas would you have for them to consider?
3. Offering a PRI option to your network can be a smart development strategy that complements traditional donation fundraising efforts.

What do you think professional advisors, like wealth planners, should know about PRIs?
In general, “impact investing” is a huge trend.  PRIs are a powerful tool in that broader movement, and knowing how they work and when they might be advantageous can add value to your client.
Having solid information about PRIs to provide your clients is also really important. In addition to the PRI Pulse Research Report, Venn Foundation also has made a library of quality PRI resources available on its website at www.vennfoundation.org/resources.

How did you get into this line of philanthropic work?
I have been an entrepreneur in both nonprofit and for-profit secures. I started with Breakthrough Twin Cities and then Snake Oil, an award-winning party game. I’ve experienced first-hand how raising capital works in both philanthropic and for-profit contexts. Through these experiences, I’ve been fascinated by what types of opportunities get funding and which do not. I’m excited by the huge potential that exists for redesigning financial products to fill current gaps in the capital market.
I knew six years ago that I wanted to work with PRIs, but given how few related jobs there are, I had to get creative and make my own. While Venn Foundation is only 2.5 years old, I’ve been working toward this vision since I finished my MBA and Master of Public Policy graduate programs at the U of MN in 2014.

Are PRIs a new thing? How long have they been around?
PRIs were created as part of the Tax Reform Act of 1969, and they have long been used by leading national private foundations like Ford, Heron, MacArthur, Gates, Otto Bremer, and McKnight, among many others.  PRIs have been used effectively to launch the microfinance movement, spur economic development, advance research for orphan drugs, and provide affordable housing.
While PRIs are not new, they are still broadly underused in philanthropy.  Individuals and businesses, which together comprise ~75% of charitable giving annually, cannot directly make PRIs, regardless of the purpose or terms of the investment.  And while public charities, donor-advised funds (DAFs), and private foundations legally can make PRIs, they face many practical challenges.
The Lilly School of Philanthropy reports that in 2004, the peak year for PRI activity from 2000-2010, only 137 out of ~66,000 US private foundations made a PRI and less than 1% of all US charitable distributions were structured as PRIs. Most DAF sponsors do not allow their DAFs to recommend PRI distributions, even though they legally could do so. VENN DOES NOTHING BUT PRI. 
In Minnesota, the statistics are similar. Venn Foundation reviewed the tax forms of 1,600+ private foundations for each year from 1998-2016, and found that during this time period only 39 private foundations reported making even one PRI. In an average year, only 11 private foundations made a PRI, and the total amount deployed in PRIs annually was ~$9 million out of $1.3 billion in total distributions.

I can’t believe how few people know about PRIs and how relatively little it is employed? Why do you think PRI is such an under-utilized tool?
1. Knowledge
Most private foundations are unaware of PRIs, how they work, and what they can offer.  Once aware of the tool, foundations may not know how to actually use them as part of their broader impact strategy. Examples of peer foundations using PRIs successfully can be difficult to come by, so there is a shortage of role models to follow.
2. Operational
Once a private foundation decides it wants to make PRIs, there are a whole host of operational questions to work through. Typically, the foundation needs to source, vet, negotiate, and service its PRIs all while managing distribution timing. Whether foundations develop in-house staff/board capacity to fill these functions or pay for outsourced support, PRIs can have high transaction costs relative to grants.
3. Legal
Depending on the type of PRIs being made, legal ambiguity and risk can be introduced. For PRIs made to non-exempt recipients, for example, the foundation has to exercise “expenditure responsibility,” and missteps could result in excise taxes. Making an investment rather than a grant also can create new legal liabilities if the PRI recipient runs into problems or if conflicts arise with other investors.
4. Political
Some foundations do not want to assume an “investor-investee” relationship and are not interested in enforcing investment terms against a PRI recipient. Additionally, political dynamics internal to the foundation can sometimes add challenges to introducing a PRI program.
Perhaps the biggest barrier, however, is the existing mindset that the best (only) way to achieve charitable impact is through one-time grant distributions, and that the purpose of making investments is (only) to make as much money as possible.  PRIs only make sense if we recognize that charitable impact can be meaningfully advanced through investments and not just grants.

Where do you see the future of Program Related Investing?
I believe the future of PRIs lies in syndication…the idea that any number and any type of philanthropists can easily join together to support the same PRI opportunity without any more effort than it takes to make a normal grant or donation to a 501(c)(3) nonprofit today.  Venn Foundation’s innovative PRI syndication model provides philanthropists the same key benefits of making PRIs directly but without any of the typical burdens. This is what will mainstream PRIs.
As for how PRIs will be used to generate charitable impact, we have just scratched the surface. I jokingly call PRIs the “Starship Enterprise of Capital” because they can go where no other capital has gone before: where for-profit investors normally and understandably take a pass, where risks are too high, where returns are too low, where liquidity is too far away. With PRIs, we can challenge all of the conventions of capital that we know today. And as a result, PRIs can succeed where our current capital markets fail.  
Venn Foundation is currently piloting a number of “big ideas” for PRIs in the areas of nonprofit capital campaigns, education finance, university technology transfer, affordable housing, government tax credit advances, and risk capital for social enterprises. Many more applications are waiting to be explored.

Finally, what are your favorite resources for people who want to
1) learn more, or 2) fund a PRI, or 3) apply for a PRI?
1. In addition to resources mentioned above, your readers can find us online at www.vennfoundation.org. We also invite people to sign up for our monthly newsletter.
2. Explore current PRI opportunities you can support at Venn.

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