Social Finance - Program-Related Investments

 

Program-Related Investments is the third post in our series about social finance tools.

Urban Matters’ Social Finance Lead, Jerome Lengkeek, explores Program-Related Investments (PRIs), how social entrepreneurs, non-profit organizations and charities can benefit from them and Foundations can use them to drive social change.

 

Program-Related Investments have been used around the world for over 40 years.

They are a common way that both charities and foundations in Canada achieve their charitable purposes. This article will provide some background on program-related investments and our thoughts on why they are an important tool for those of us that want to use money and finance to drive change and progress.

What’s a PRI and Why You Should Care

A Program-Related Investment has traditionally taken the form of a below market rate loan made to a non-profit or charity. Over the years, program-related investments have begun to broaden in form, and have become far more common. Their use has been growing exponentially over the last decade just as we’ve seen with the popularity of impact investing.

The largest and most common PRIs were used to expand affordable housing and community development efforts.

Investments structured for these purposes typically offer a below-market rate as an incentive to attract a private company to develop housing for the bottom end of the market, creating an entry point for those previously unable to enter the market.

Real estate-oriented PRIs also provided a pathway for non-profits or charities to reduce their operating costs and even create non-grant revenue streams.

For example, a program-related investment could be a loan to charity which rents the facilities it operates in. This loan could be used to purchase their building, creating stability for the organization in its operating expenses.

If the building also has other commercial tenants, the revenue from those leases could also create that sustainable revenue stream for the charity once the loan to the PRI investor has been repaid.

Foundations have used PRIs to create social impact using their endowments rather than just through grants.

Rather than investing their endowments into a portfolio of traditional financial investments, they are increasingly placing a significant portion of their endowment into investments that create direct social benefit, including PRIs.

Some of these investments have been on an enormous scale, and therefore have greatly increased the impact of these foundations.

The Bill & Melinda Gates Foundation has well over $1 billion of PRIs. They use them to drive their social progress agenda.

For example, the Gates Foundation has a major focus on efforts to eradicate diseases like malaria. They use PRIs to invest in bio-technology firms that research treatments and vaccines into malaria, which are otherwise overlooked by bio-techs because they are less profitable than research into diseases that are more common in developed countries. These investments are yielding significant progress and results.

How Program-Related Investments Could Benefit You

If you are a foundation or non-profit with an endowment or significant reserves, program-related investments are something that should be considered as a way of magnifying your impact beyond your granting.

Or if you are a social entrepreneur or non-profit, this might be a different way of attracting growth capital or obtaining a loan rather than pushing for grants and donations or going to exclusively profit-driven investors.

Canadian Examples

Although the largest and most experienced PRI investors in the world are American foundations (think Ford Foundation, Rockefeller Foundation, Lilly Endowment, etc), program-related investments can also be used by Canadian organizations.

The Canada Revenue Agency (CRA) has put out and updated guidelines for program-related investments, the most recent being CRA CG-014 July 26, 2012 (rev Aug 9, 2017).

The CRA says that PRIs include loans, loan guarantees, share purchases, or leases of land or buildings. A critical concept to them is the matter of “intentionality” – although a financial return can be received, the purpose of a PRI must be charitable.

PRIs allow a foundation to magnify charitable benefits by re-using PRI capital returns to fund other charitable activities.

Another concept that CRA lays out is that direction and control of the investment is critically important. They also stipulate that the investor should ensure that exit provisions exist in case they are directed by CRA to do so. In the Canadian context, foundations have less restrictive rules than other non-profits or charities.

If you need help interpreting these regulations, we advise you to make contact with an accounting firm or lawyer specializing in non-profit practice.

We recommend PRIs as a highly effective tool in magnifying impact, but before embarking on the path of engaging in PRI investing, seek advice and do your research.

The Role of PRIs in Stimulating Innovation and Impact

The Rockefeller Foundation is a leader in the use of program-related investments to drive social finance innovation. They use PRIs to:

  • Test the impact investing thesis (you can achieve both social and financial returns)
  • Piloting Innovative Financing Structures (to attract private sector investment into impact investing)
  • Providing financing to test and prove economic models related to their initiatives

Because they do not have the same pressure to drive a financial return as other investments, the PRI can use more innovative structures and take on a bit more financial risk in return for greater social impact.

At Urban Matters we are also constantly innovating along the same lines as Rockefeller has stated above. Our incorporation structure as a Community Contribution Company (CCC) in British Columbia frees us from the pure profit-seeking motives held by many owners of incorporated for-profit ventures.; at the same time, it allows us to seek financial returns on our investments alongside our social returns.

If you are incorporated as a CCC, a non-profit, a charity, or a foundation, it is definitely worth considering how a PRI might help your organization to create impact beyond simply giving grants. Through the recycling of returns, PRIs can be a gift that keeps on giving.

Additional reading:  Jerome’s overview on Social FinanceSeed Funds, and Social Lending


 

This article was written by our Social Finance Lead, Jerome Lengkeek. He helps improve the financial sustainability and impact of the social enterprises that are part of our incubation family. As a member of Urban Matters’ team of community social innovation specialists, Jerome is available as a resource to help other community impact organizations achieve some of these same objectives. Have a question, or want to talk to us more about social finance, Jerome would love to hear from you. You can reach him at jlengkeek@urbanmatters.ca.

 

 

 

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