Georgia Levenson Keohane will be a CEP guest blogger from January 25 – February 5, 2010.
The challenge for foundations in this economic crisis has been to do more with less. On average, the nation’s endowed philanthropies lost 28 percent of their value in 2008, just as the needs of nonprofits and the people they serve began to spiral.
And yet, despite the conventional criticism– that foundations are conservative and slow to change – many have responded quickly and creatively to support the work of their grantees.
An increase in the use of program related investments (PRIs), for example, marks an important step in how foundations finance the work of the social sector.
Although it’s still only a relatively small number of foundations that use PRIs – investments made to support charitable work with the expectation of return – the increased prominence of this philanthropic approach is an unintended but important legacy of the downturn – and one which might lead to greater innovation in the social capital markets.
PRIs are not exactly new. The Tax Reform Act of 1969 first defined them as investments made by foundations to support a charitable project or activity. Large philanthropies like Ford, MacArthur, Packard, and others pioneered the approach.
Over the last decade, the number of foundations engaged in mission investing has doubled, and the dollars invested this way has tripled. Most of the growth in PRIs has occurred at small- and middle-sized philanthropies, like the $227 million Heron Foundation in New York City.
Founded in 1992, Heron has played an important role in advancing the PRI field. Unlike more cautious PRI investors, Heron has preserved the value of its endowment by making “core support” grants within the 5 percent payout IRS requirement and deploying 50 percent of its endowment to finance projects that might not otherwise find affordable capital in the commercial markets.
Heron’s PRIs include things like loans for a child care center in Trenton and affordable housing in Nashville, working capital for a Yonkers bakery that hires “hard to employ” workers, and a limited partnership stake in a Rural Business Investment Company promoting economic development in Appalachia.
Heron contends that this integrated approach of grants and PRIs enhances its philanthropic impact, belying the notion that effective philanthropy requires a Chinese wall between endowment and charitable investing.
Heron’s PRI returns are hardly anomalous. A 2007 report from FSG Social Impact Advisors shows that, over a forty-year period, 96 percent of loans made to nonprofits by foundations have been repaid. These findings should reassure foundation officers concerned about the risks of PRIs; even in a strong market, low beta investments in the social sector can offer smaller but consistent yields. Recently, as our definition of “market return” has altered, PRIs may present a particularly attractive ROI.
It is not only perceived risk, however, that has discouraged foundation executives from making PRIs. Many, often rightly, believe they lack the financial expertise to evaluate program related investments. In response, a number of organizations have emerged to help foundations overcome this obstacle.
The PRI Makers Network, for example, is an association of 90 PRI grantmakers that provide tools, professional development, and other resources to foundations engaged in program related investing.
More for Mission is a campaign organized by the Annie E. Casey and Heron Foundations and the Meyer Memorial Trust to advance mission investing and to encourage foundations to spend an additional 2 percent of assets – or an industry total of $10 billion – on PRIs.
Consultancies also offer expertise in mission investing. And collaborations between foundations like Living Cities have created social investment vehicles such as the Catalyst Fund – $20 million in debt capital – for community based organizations around the country that work on urban development.
For foundations new to mission investing, the Catalyst Fund promises a chance to “invest alongside PRI pioneers” and “build a diversified portfolio without hiring additional, specialized staff.”
In 2009, when most philanthropies were scaling back their charitable commitments, a handful of others targeted more than $185 million in PRIs to respond directly to the effects of the economic crisis. According to data from the Foundation Center, most of the first emergency PRIs went to housing and shelter.
The MacArthur Foundation, for example, which has long focused its PRI efforts on affordable housing, dedicated $60 million in PRIs to prevent large scale foreclosures in its hometown of Chicago, as well as PRIs to fund similar efforts in North Carolina and Minnesota.
The Ford Foundation made more than $100 million in foreclosure-related PRIs to national housing organizations. Significant PRI dollars also went to emergency assistance, such as the Kresge Foundation’s $2.5 million award to Feeding America, the nation’s largest hunger relief agency, to finance the purchase of 25 refrigerated trucks for food banks and mobile pantries.
Kresge also established an interest-free PRI Community Relief Fund offering bridge loans to “high performing” human service organizations to better meet the increased demand for their assistance.
In September, the PRI landscape morphed once again when the Gates Foundation announced it was allocating $400 million for loans, investments, and other “non-granting financial instruments” to advance its anti-poverty work. Like many Gates initiatives, this foray into PRIs was not the first in the field, but its scale and profile sets an important precedent for other philanthropic investors.
In some ways, the growth in PRIs can be seen as one part of the expanded social capital marketplace. This would include the approximately $4 billion passed through community development financial institutions (CDFIs) each year, which is set to increase significantly with additional stimulus funding. Some, like the Rockefeller Foundation, who champion “impact investing” more broadly claim that investments which address social and environmental problems while also turning a profit represent, potentially, a $500 billion industry.
In spite of this momentum, the number of foundations actually making program related investments remains small. Of the thousands of grant making foundations in the United States, only a few hundred use PRIs.
The downturn has shown the importance – and relative facility – of deploying much needed capital to struggling nonprofit organizations. PRIs offer an important way for foundations to expand their philanthropic reach.
