Unique Opportunities to Leverage Foundation Assets. Kate Barr, Executive Director March 2011

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1 Program Related Investments: Unique Opportunities to Leverage Foundation Assets Kate Barr, Executive Director March 2011

2 Mission-related investing encompasses any investment activity which seeks to generate a positive social or environmental impact in addition to providing a financial return Source: Rockefeller Philanthropy Advisors

3 Spectrum of Foundation Investments Grants Below Market rate Mission Investments (Includes most PRIs) Market rate Mission Investments Conventional Investments Charitable Financial Objectives Objectives Negative 100% Expected Financial Return Source: FSG Social Impact Advisors: Compounding Impact March 2007 Market rate Expected Return

4 Goals of Mission Related Investing Supplement and increase impact made by grant activities Opportunity to participate in additional types of activities Extend and broaden impact Longer term commitment and sustained activities Desire to reflect mission & values

5 Below-Market Rate Investments Program Related Investments Direct loans Below market bank deposits Other PRIs: commodities, real estate Venture capital funds Guarantees Direct guarantees Linked Deposits

6 Market Rate Investments Bank deposits Community Development banks Banks selected based on CRA criteria Risk adjusted investments Direct investing with mission criteria: environmental, social, and governance benefits Co-investing with institutional partners

7 Mission Related Tools & Tactics Active ownership strategies Proxy voting Shareholder resolutions & coalitions Screening Negative screening Positive, or best-in-class, screening Screened funds

8 Mission-Related Investing Continuum Market rate Mission related investments Cash Fixed Income Public Equity Private Equity Higher risk Lower risk Guarantees Lower risk Higher risk Grant support Private Equity Loans Cash Below Market Investment Source: F. B. Heron Foundation

9 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)

10 IRS Requirements Current requirements for a PRI: (1) Its primary purpose is to accomplish one or more charitable purposes (2)No significant purpose of the investment is the production of income or the appreciation of property (3)No purpose of the investment is the carrying on of propaganda or otherwise attempting to influence legislation or intervening in any political campaign on behalf of any candidate for public office

11 Who Makes PRIs? Private foundations Specific subject of IRS rules Family foundations Community foundations Corporate foundations Non-foundation charities Financial institutions and corporations

12 PRIs Use is Growing Year Amount # PRIs #Foundations $ 427 million $ 736 million Source: The Foundation Center

13 Funder Benefits Recycled Resources PRIs can be used to advance program goals and, once they are repaid, can be re-used for new projects. Large Projects When a desirable project requires funding that exceeds a foundation s typical grant size, PRIs can sometimes provide the needed capital, e.g., to finance a capital improvements or a facility. Varied Partners and Leverage PRIs may attract others to the project and leverage additional funds from banks, corporations, or government.

14 Funder Benefits Visibility PRIs may help support a particularly important local project that requires capital investment. Pay-Out Requirements For private foundation, PRIs may help meet pay-out requirements during a time of unexpected asset growth. PRIs provide immediate distribution credits, with the likelihood that the capital will be available again in the future.

15 How are PRIs Used? Anywhere that capital is needed Capital projects Bridge loan for capital campaigns Affordable housing projects Loan funds and microfinance Program expansion Nonprofit capacity building Entrepreneurial ventures

16 Borrower Benefits Long-Term Relationship PRIs help establish productive, long-term relationships with a funder by creating a partnership with mutual financial and program objectives. Shared Commitment to Mission PRIs are often more flexible that traditional loans because of common goals for mission and impact. Large Projects PRIs can help raise capital in addition to grant resources for larger projects.

17 PRI Structure Size Range from small ($5,000) to multi-millionsmillions Very frequently $100, ,000 Interest Rates Interest rates vary based on project and borrower Common rates 2% 3% Duration Needs to match the purpose Terms from 3 months to 15 years

18 Risks of PRIs Repayment risk Most PRIs are paid on time with interest Managing risk is important from start to finish Interest rate risk Using funds for PRIs may have opportunity costs Reputation risk Enforcing a loan agreement can result in PR issues

19 PRI Examples New building project Major program expansion Microfinance pool

20 Implementation Considerations Specific goals, criteria, and benchmarks Mission i and financiali Decision process, roles & authority Grant program and financial involvement Review & due diligence process Staff and/or outside advisors Criteria for PRIs

21 Underwriting PRIs Mission & Program Review Financial review Financial analysis of organization Purpose of PRI Sources of repayment Project risks Organizational risks

22 Operational Considerations Structuring the PRI Repayment terms Interest rate Completing the transaction Legal and financial documentation Covenants Loan documents Secured or unsecured Requirements for reporting

23 PRI Portfolios Monitoring & recordkeeping Systems for tracking Enforcement of required reports & payments Resolving problems Communications Repayment & financial performance Programmatic performance and results

24 Legal Advice is Needed Investment Charitable purpose required? No Yes Counts towards 5% payout? No Yes* Included in asset base for 5%? Yes No Expenditure responsibility required? No Yes* Could be jeopardy investment? Yes No Excess business holdings rules apply? Yes No Report on Form 990-PF / 990? No Yes Must be prudent? Yes Yes* Permissible ibl endowment investment? t? Yes Yes* Source: Hazen Graves presentation, 2009 MCF/MCN Conference PRI Always seek legal advice before relying on information

25 Prudent Oversight But it s not that black and white Some investments might not qualify as PRI s, but you are willing to sacrifice some financial return in exchange for mission return For tax purposes, treat these as regular investments Address PRIs and MRIs in your investment policies Treat each as an asset class Consider the rationale for including them, and the risk and return implications of doing so-particularly for endowment funds Document your discussion, to demonstrate prudence and compliance with fiduciary standards

26 Accounting for PRIs Private foundations Technical PRI Report on 990PF Part of minimum payout py Asset class on balance sheet Other foundations Generic PRI Asset class Foundation may also maintain a loss reserve contra-asset

27 How PRIs Work Corpus 5% Distribution ib ti + Grants Repayments of principal PRI Interest Principal Repayment

28 Evaluation of PRIs Financial performance Interest payments Principal repayment Goals and benchmarks Mission impact Mission impact Short term activity goals Outcome goals Alignment with overall foundation strategy

29 Approaches to PRIs PRIs to current grantees PRIs to implement a strategic goal PRIs to help solve a problem PRIs to intermediary

30 Community Development Intermediary Community Development Financial Institutions(CDFIs) are an efficient conduit for capital PRI capital Grant capital Community development loan fund or venture capital fund Expertisei Staff & systems Risk mgmt Evaluation Loans Technical assistance & support Equity investments

31 PRI Trends PRIs from more types of foundations and charitable organizations PRIs from donor-advised funds PRIs to for-profit businesses for economic development Foundations attracting groups of funders for large PRIs

32 Strategic Considerations Mission and values Long term goals and purpose Financial expectations Appropriate investment vehicles Investing approach Direct, independent investments Co-invest with others Pooled investment vehicle

33 Developing a PRI Strategy Susan Hayes, Director of Community Grants & Services Lutheran Community Foundation Terry Williams, Director of External Affairs Women s Foundation of Minnesota

34 Nonprofits Assistance Fund Nonprofits Assistance Fund helps nonprofits realize their visions Loans for nonprofits Healthy management practices Strategic financial guidance