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Program-related Investments: The Venture Capital of Philanthropy (Part 2)

By Nicole Motter


The second installment written by Nicole Motter about PRIs and their role in the future of philanthropy. Click here to read part 1.

As any good private foundation knows, Rule #1 of being a foundation is that you’re legally required to spend a certain amount of your funds every year in furtherance of your mission (5% of net assets to be exact).

There are two ways for foundations to meet this requirement. Most foundations– whether through lack of knowledge to the contrary, preference, or sheer convenience—meet this requirement by making grants to tax-exempt nonprofits. The other way to meet it is by making program-related investments (“PRIs”).

PRIs are a grant alternative, and one fully encouraged and supported by the IRS via the laws in the tax code. There’s actually no legal requirement that a private foundation make any grants at all (yes, it’s true).

Unlike some other terms you’ve likely heard like “mission-related investments” and “impact investments,” PRIs are a legally-defined tool, with specific parameters around how they are classified to meet IRS requirements and how they are managed. Those requirements essentially boil down to the following. To “count” as a PRI (instead of a grant), the PRI must: (1) be made with the primary purpose of fulfilling the foundation’s mission, (2) be made with no significant purpose of producing income or appreciating property, and (3) not be made for lobbying or political activity. And any return of principal or dividend on the PRI must be recycled back out to mission-aligned causes the following year.PRIs - Part 2

 

If you’ve heard about PRIs before, there’s a fair chance you’ve been thinking about them all wrong. Mainstream lawyers that have opined on this topic have largely made them sound overly complex, or burdensome, or time-consuming. None of these have to be the case. There’s no need for a “portfolio” and there’s no need to be overly concerned with “ROI”. Impact is the main focus. All that matters is that a return is possible. A good financial return shouldn’t be the primary consideration.

The way we see it, you have two options with your grant-allocated money:

  • Option 1: Go to the window and throw a chunk of it out, never to return. We’ll call this a grant.
  • Option 2: Use that same chunk of money towards a PRI, and have the possibility of getting your money back to reuse for social purposes. If the money is never repaid, the foundation doesn’t get in trouble. The PRI essentially converts to a grant.

With a PRI, you take the same money you would otherwise use towards a grant, and make a low- or no-interest loan or take an equity stake in an entity of your choice (although virtually any financial vehicle will work). There are some rules that need to be followed (read: don’t try this at home, and we’re oversimplifying here a bit), but as long as the funds are being used for a purpose that aligns with your mission and your main focus isn’t making money, the bottom line is that it’s really not that complicated at all. Just make sure you’ve got a qualified PRI specialist on your team to make it happen. And, hey, bonus, you’d be doing the social enterprise world a huge favor.