In this Q&A, Carol Lewis, president and CEO of Philanthropy Northwest, and Doug Stamm, CEO of the Meyer Memorial Trust and co-chair of PRI Makers Network, discuss program-related investments (PRIs). Philanthropy Northwest hosts PRI Makers Network—an association of grantmakers that uses program-related and other investments to accomplish their philanthropic goals.

In general, a PRI is an investment—a loan or loan guaranty, a stock purchase, or a letter of credit—that is made to further a private foundation’s exempt purposes. The investment may be in a for-profit or nonprofit entity. Unlike grants, however, foundations get a return on their investment, either through repayment or return on equity.

Question: In the current economic downturn, what are the benefits to a foundation that wants to use a PRI strategy?

Carol Lewis: It’s a terrific time for foundations to look at PRIs. In the current climate, foundations are faced with some tough questions. Certainly one big question is how to meet community needs in very tough times, without spending the corpus of the foundation endowment? A PRI strategy, used appropriately, allows a foundation to remain highly engaged in supporting critical needs but does not necessarily require selling its assets to do so. We have investment advisers in the Northwest encouraging foundation clients to look at PRIs for the first time.

Doug Stamm: For a foundation, a PRI is an additional vehicle it can use to further its mission and goals. PRIs have also proven (especially in this economy) to be a more stable and positive return investment, because you are being repaid by the recipient organization. For a nonprofit that’s use to getting loans from a traditional lending institution, a PRI is another potential revenue stream, which may offer better terms and (potentially) greater funding.

Q: What are the challenges that foundations should keep in mind?

Lewis: Making a PRI requires a different level of analysis—as compared to making a grant. One goes through the same due diligence process as grantmaking, but the questions are different. For example, you need to know whether the organization is creditworthy. Will the nonprofit be able to pay back the loan?

In addition, foundation staff may not have the skill set required to issue and manage PRIs. It’s a fairly new area for most program officers. Remember, it is a combined program and investment decision, not a more standard grantmaking decision. Additionally, in most cases, loan documents will require legal review. It’s very important that staff receive support and training. The PRI Makers Network programs are popular because of the technical training and peer connection the group offers.

Stamm: PRIs can appear challenging but it all depends on how you choose to structure your program. Building on what Carol said, both the foundation and the nonprofit organization must first understand what a program-related investment is and how it works. The PRI Makers Network is a good resource to understand both these issues. The web site has resources—such as sample documents, forms, and publications.

Second, if a foundation doesn’t have the in-house capacity to structure and manage PRIs, then a consultant should be brought in. It goes back to the number of PRIs you manage and how complex they are. Based on your answers, you will need to ensure you have the appropriate staff and expertise to manage the PRIs.

Q: Describe a situation where a nonprofit would look to a foundation to support the organization with a PRI. From a foundation’s perspective, why would it make such an investment?

Lewis: Imagine a nonprofit that would like to own its own building because over time, it makes more economic sense than renting. But it may be challenging—especially in the current climate—for the nonprofit to accumulate the capital to purchase the building. Now imagine that the nonprofit can approach its donors to make a business case for owning rather than renting. Of course, the nonprofit needs to demonstrate it will have the income to pay back the PRI maker, but presumably, under the rent scenario, it would have to spend some portion of its operating budget on rent.

Foundations wishing to make PRIs have to consider projects where there is a reasonable expectation the loan will be paid back. My view is that those cases may be more prevalent than most funders imagine.

Q: Are there risks to providing loans to organizations—especially in the current economic climate?

Lewis: It’s a tight time in the credit markets and it’s difficult to borrow money. I don’t believe there’s a risk because these organizations are not highly leveraged and not dependent on credit markets.

Stamm: We manage many PRI relationships and we’ve had no major issues with our nonprofits. Before we make loans, we do carefully assess whether the organization will be able to repay the amount and we receive regular reports on the PRI and financial status of the nonprofits.

Q: Is there a particular size/type of foundation that lends itself better to making PRIs?

Lewis: There is no particular foundation that lends itself better to PRIs. The one question a foundation should ask itself is whether a PRI is appropriate for and aligns with its mission and the causes it supports. The foundation’s objectives will determine if such an investment will work in the local community.

Stamm: Any foundation can make a PRI—it just depends on the size and complexity of the PRI. It is tool that all foundations should consider in an effort to increase their impact.

Q: What advice would you give grantmakers interested in pursuing PRIs?

Lewis: I would recommend the following:

• Learn as much as you can about PRIs before making the decision to get involved.
• Work closely with the financial side of your foundation—you need to make sure you have the support of those responsible for managing the foundation investment decisions. They can help you determine the appropriateness of PRIs for your organization.
• Join the larger PRI community so that you can be in a continual learning mode about PRIs.

Stamm: Here’s what I would suggest:

• Determine your foundation’s risk tolerance. After all, you are investing in an organization.
• Identify your PRI parameters, such as the terms under which you want to structure a contract: how much of your budget you may want to commit to PRIs; the size of your PRIs ($10,000, $100,000, or smaller or greater amounts), etc.
• Involve your CFO and finance team in the PRI process—especially on due diligence issues.
• Provide your staff with PRI training so that you can learn about others’ experience with this vehicle and how to manage a PRI program.
• Designate a point person at the foundation who manages the PRI process and relationships. This person should have the required skill set and/or access to people who can move the process along.
• Start small and simple: start with an area you are familiar and comfortable with. For example, the Meyer Memorial Trust started making PRIs in organizations involved in affordable housing because that was one of our grantmaking areas.
• Communicate your PRI program to the community; it’s a form of “expanded philanthropy” but people won’t know about it if you don’t share the details of your program and how it works.

Resources

This is intended as a primer on PRIs. To learn more about PRIs, visit the PRI Makers Network at www.primakers.net or consult your legal counsel for advice. In addition, the Council publication, Economic Development: A Legal Guide for Grantmakers by Jane C. Nober, includes a primer on program-related investments.