PRI 101: The Basics of Making a PRI

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1 PRI 101: The Basics of Making a PRI Grants Managers Network Conference March 17, 2010 Christa Velasquez

2 Topics of Presentation Definitions Benefits of PRIs Making PRIs Monitoring and tracking PRIs PRI accounting issues Resources 2

3 Bay Area Equity Fund $75M private equity fund Invests in companies in low income communities of the Bay Area Partnership with Bay Area Council for deal flow and workforce development $1.65M Casey equity investment (PRI) 10 year partnership Originally set PRI-like return expectation of 10-12% (now performing in top quartile) 10 year goal of 1,500 new jobs created Cumulative jobs created since inception (2007YE): 1,163 Cumulative jobs for low-income individuals created: 628 3

4 Defining PRIs 4

5 Program-Related Investments Make foundation funds available for charitable purposes (like grants) but Generally come back to the Foundation, with some interest (unlike grants) and Can never be made for the primary purpose of financial gain (unlike regular Foundation investments) 5

6 Foundation Perspective: Investment Tools Grants Program Related Investments Endowment Investments Programmatic Returns Financial Returns 6

7 Social Investment Definitions PRIs only category with a legal IRS definition Primarily to achieve program goals Terms must be below market on a risk-adjusted basis Does not support lobbying Must be investigated, documented and monitored Foundations may make other charitable investments that don t qualify as PRIs Financial return primary or equal goal with social return Emerging philosophy of using all (or more) assets to support mission Terms may include Social investing, Mission investing Socially responsible investing Mission-related investing Integrated investing Double/triple bottom line investing 7

8 Social Investment Continuum New Frontiers in Mission-Related Investing, F.B. Heron Foundation,

9 Why PRIs? 9

10 SI Benefits for Foundations Mission More assets working towards mission Augment grants Feasibility Proof of concept (prove creditworthiness) Leverage Attract other capital from banks, corps, govt by taking real/perceived risk Flexibility Fill financing gap Variable structure & terms Size Can fund larger projects that exceed typical grant amounts (PRIs) Pay-out Can help meet distribution requirement (PRIs) Recyclable Can be redeployed for new projects Strength Foster sustainability Increase accountability 10

11 PRI vs. Grant Use a grant when Affordability gap vs. financing gap Extremely high risk level Smaller $ amounts No repayment source/repayment relies on fundraising Use a PRI when True financing gap Reasonable risk level for expected social return Larger $ amount Obvious and reliable repayment source Stable competent management and board leadership 11

12 PRIs & Grants as Complementary Tools E&Co, an energy investment intermediary, proposed to develop small to medium enterprises in order to disseminate solar energy systems to rural poor people in Tanzania. The Lemelson Foundation: Gave $180K grant to identify, screen, and develop the business capacities of small retailers. And A $400,000 program-related investment for E&Co to disburse to small retailers to start or strengthen their business. 12

13 Who Uses PRIs? PRI uses reported uses From adoption to pharmacology to wildfire Recipients in 45 US states and 37 other countries From Alabama to Wyoming and Brazil to Yugoslavia Many types of PRIs loans, equity investments, lines of credit, linked deposits, real estate purchases, guarantees 13

14 Small Number of Foundations Are Making Social Investments 14 Source: Compounding Impact: Mission Investing by US Foundations, FSG Social Impact Advisors, March 2007

15 Annual SI Volume Growing But Still <$200 Million 15 Source: Compounding Impact: Mission Investing by US Foundations, FSG Social Impact Advisors, March 2007

16 SI Program/Issue Areas 16 Source: Compounding Impact: Mission Investing by US Foundations, FSG Social Impact Advisors, March 2007

17 The Downside Can be complex and time consuming Requires programmatic and financial skills Legal fees and other transaction costs Negotiations and structuring potentially adversarial Social impact difficult to measure/ quantify Long-term reporting and monitoring 17

18 Making PRIs Programmatic review and due diligence Investment analysis Charitable financial and business risks PRI determination Risk-return profile not attractive to ordinary investors But for the charitable purpose to be accomplished, the foundation would not make the investment Legal documentation Loan agreement & promissory note, partnership agreement May include financial and other covenants Legal opinion not required but common practice 18

19 Monitoring PRIs Regular reporting from investee organization Financial and programmatic data Frequency depends on foundation, investee organization, activity Internal tracking varies by foundation Portfolio management Track repayments, earnings and adjustments Assess risk of investments/portfolio Determine valuation for balance sheet 19

20 Environmental PRI Root Capital Moriah Fund interested in rural development strategies that improve the livelihoods of rural and indigenous communities while conserving and managing natural resources and biodiversity in a sustainable manner Loan to Root Capital (EcoLogic Finance) $100,000 5 year loan at 2% -Restricted for use only in Guatemala -Small business loans to rural producer organizations that have existing sales relationships with green market makers 20

21 How PRIs Affect Payout Requirement Counts toward 5% payout requirement the year the PRI is paid When PRI is repaid, qualifying distributions are reduced Considered a recovery and increases required distribution PRIs are not included in net value of non-charitable use assets 21

22 PRIs on Financial Statements and General Ledger All PRIs booked same as any other fair market value Can list PRIs as a separate asset line on balance sheet Can provide additional PRI details in a separate footnote May be required to disclose and record loan guarantees if they meet the contingent liability rules 22

23 PRIs Reported on 990-PF Tax Return Shows on balance sheet section (Part II) Special section (Part IX-B) Summary of Program- Related Investments Included in payout section on qualifying distributions (Part XII) Recoveries are included in distributable amount computation (Part XI) 23

24 PRIs and Expenditure Responsibility Some PRIs subject to ER reporting ER rules apply to both PRIs and grants PRI proceeds and earnings must be kept in separate account by investee organization Resources Expenditure Responsibility Step by Step, John A. Edie Program-Related Investments: A Technical Manual for Foundations, Christie I. Baxter 24

25 Social Investing Resources More for Mission Campaign: PRI Makers Network: Global Impact Investing Network (GIIN): esting.shtml Foundation Center: (PRI Directory) Grantcraft: (PRI grantcraft guide) Social Investment Forum: Council on Foundations: (Resources for Grantmakers) Investor s Circle: 25

26 Social Investing Resources Boston College Institute of Responsible Investment: (handbook of asset classes) Cambridge Associates Mission Investing Group: FSG Social Impact Advisors: (mission investing study) Monitor Institute: (Investing for Social & Environmental Impact report: Opportunity Finance Network: (CARS rating system) Rockefeller Philanthropy Advisors: (trustee handbook) Foundations with SI experience 26

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