Is it ever worthwhile to accept concessionary investment returns?

If your foundation’s aim is to achieve not just personal financial gain but also a specific positive social or environmental impact, the answer is a resounding yes. Foundations make program-related investments (PRI) to support charitable activities, with the potential return of capital within an established time frame. For example, one of the Bill and Melinda Gates Foundation’s many PRI is the Charter School Growth Fund, a low-interest loan reinvestment aimed to “provide high-performing and high-potential charter school operators with facility financing,” according to the foundation.

Like the example above, PRI include financing methods commonly associated with banks – such as loans, loan guarantees, and equity investments. In order to be considered PRI, an investment must meet criteria established by the Internal Revenue Service, which says an investment is PRI if:

• Its primary purpose is to accomplish one or more of the foundation’s tax-exempt purposes
• Production of income or appreciation of property is not a significant purpose

and

• Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose

Some of the nation’s largest foundations have become strong champions of PRI. For example, the Gates Foundation has been a staunch promoter of PRI and itself allocated $1.5 billion to fund PRIs, of which it has committed $1 billion across 47 investments, according to a Stanford Social Innovation Review (SSIR) article. The Rockefeller Foundation’s PRI portfolio, launched in the 1990s, now contains $25 million in international and domestic investments in the form of loans, equity investments and guarantees, according to the foundation.

Common misconceptions about PRI

Despite the IRS’s efforts to provide solid guidance on impact investing, some foundation boards are still leery of PRI. For example, some boards fear that, due to PRI’s tendency to yield only concessionary returns, PRI is a breach of their fiduciary duty. However, the IRS guidelines above should alleviate those worries because PRI, by its very nature, should not be aimed to produce financial gains.

Inversely, other boards may worry that PRI will produce financial gains, causing a squabble with the IRS about whether or not the investment is in fact PRI. Although the primary aim of the investment cannot be significant income production, if that does occur, that alone “in the absence of other factors” is not “conclusive evidence” that the financial gain was the foundation’s primary goal, according to the IRS. In other words, foundations do not have to fear that making money from PRI will in itself make the IRS consider the investment no longer eligible as PRI. (Note: Consulting with a tax professional may help in this matter.)

Meanwhile, it is important not to confuse PRI with mission-related investments (MRI), which are financial investments that follow an organization’s mission, generating both social and financial return. Unlike PRI, MRI are not charitable activities and thus do not count towards a foundation’s 5% annual payout requirement.

What are the benefits of PRI?

The most obvious benefit of PRI is that it counts towards a foundation’s 5% annual payout requirement, yet there are also many more. In fact, PRI is a powerful and versatile tool that works alongside grant-making, as it allows foundations to leverage their financial resources more effectively than grant-making alone, which is often not enough capital to bring solutions to scale.

Thus, with PRI, foundations can support work toward a better future, whether it be helping to fund schools, developing cheaper and more widely available health products, or helping farmers in Africa grow more food. With PRI, those dreams can become a reality.

==

To read more from Steve Prostano, please visit the Bank of the West blog. This Bank of the West blog post is part of a year-long educational series that examines key philanthropy terms and concepts. Bank of the West and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, investment, tax, legal or accounting advice. You should consult your own tax, financial, legal and accounting advisors before engaging in any transaction.