Program-related investments hold potential but few foundations make PRIs, Indiana University Lilly Family School of Philanthropy study finds
Report examines recent trends, challenges and opportunities for PRIs
INDIANAPOLIS- Program-related investments (PRIs) are gaining attention from foundations for their potential to meet charitable purposes while generating financial returns, but their use remains limited, a new study by the Indiana University Lilly Family School of Philanthropy finds.
The report, which was sponsored by Mission Throttle, analyzes key trends in foundations' use of program-related investing between 2000 and 2010 (the latest year for which data are available). It examines funders' motivations and strategies for making PRIs and identifies potential obstacles and opportunities for expanded use of PRIs to advance charitable goals. The study includes both quantitative data analysis and in-depth interviews with foundation leaders.
"Our research shows that there is significant interest in and potential for program-related investments to help foundations advance their charitable goals, and many foundations that utilize PRIs report that they frequently produce successful results," said Una Osili, director of research for the Indiana University Lilly Family School of Philanthropy. "There was notable growth in PRI use in the past decade compared to the previous decade, but to date they are being used by a relatively small fraction of all foundations."
PRIs are tools such as low-interest loans or equity investments that provide opportunities for foundations to go beyond grant making to allocate a greater share of their resources to support and assist nonprofits and achieve the foundation's philanthropic goals while maintaining or growing its assets. In turn, this allows foundations to recycle their funds and leverage them for greater impact. Private foundations can count PRIs as part of their annual minimum payout.
The total dollar amount foundations invested in PRIs grew significantly between 1990 and 2009, rising from $139 million in 1990 to $701 million in 2009, according to IRS data. Additionally, the average dollar amount of PRIs made increased steadily during the period, growing from just over $666,000 in 2000 to more than $1.5 million in 2009.
However, some recent trends in PRI use reveal a mixed picture. Despite demonstrating increased interest in PRIs, U.S. foundations generally have been slow to adopt their use. During the past two decades, only about 1 percent of U.S. foundations each year made PRIs. At the peak in 2004, 137 foundations were making PRIs, according to Foundation Center data; that number declined to 97 foundations using PRIs in 2009. The number of PRIs made each year also has declined from 421 in 2004 to 244 in 2009.
Among the study's key findings:
• Housing, community development and education were the program areas that received both the highest total dollar amounts and the largest number of PRIs made by foundations between 2000 and 2010. Non-traditional program areas such as environment, health and arts and culture were also likely to receive PRI support during that period.
• More than half of all PRIs were loans, but foundations have increased the use of equity investments and debt other than loans, such as loan guarantees or loan funds.
• Despite growing interest, obstacles to the use of PRIs remain. Interviews with foundation leaders revealed four main and recurring challenges as they begin using PRIs:
• Lack of information or knowledge about PRIs
• Lack of expertise in PRI management
• Potential transaction costs associated with doing PRIs, and
• Lack of appropriate opportunities.
• Measuring success is challenging. Foundations generally define success in two ways-programmatic or social success and financial or investment success-and some deem a PRI successful even if it did not produce a positive financial return on the investment so long as it produced the desired social outcome. Achieving success requires planning, new team structures, traditional financial investment skills and social metrics.
• Peer networks play an important role in overcoming these challenges, supporting and educating foundations in the use of PRIs. Several foundations noted that dialogue among foundations and supporting professional networks have greatly benefited the expansion of the field of PRI users. The report suggests that effective impact investing strategies and implementation plans call upon investment, financial and program professionals within foundations to work together.
"This important research will inform decision making in the philanthropic community and will accelerate understanding of PRIs as a viable impact investing tool for funders who want to increase the scale and scope of their organization's ability to address a variety of challenging social, cultural and environmental issues," said Phillip Wm. Fisher, founder of Mission Throttle. "It highlights the challenges, opportunities and resources that must be part of successfully leveraging these investments."
"There is a growing perception in the foundation community that foundation resources are scarce relative to society's needs and that PRIs could offer new strategies to aid in meeting these needs," Osili said. "Currently, PRIs are an important, tool used by a small segment of the grant making community. More education and information sharing among grant makers will be needed if PRIs are to gain more widespread use and achieve their full potential."
About the Lilly Family School of Philanthropy
The Indiana University Lilly Family School of Philanthropy is dedicated to improving philanthropy to improve the world by training and empowering students and professionals to be innovators and leaders who create positive and lasting change. The School offers a comprehensive approach to philanthropy through its academic, research and international programs and through The Fund Raising School, Lake Institute on Faith & Giving and the Women's Philanthropy Institute.
About Mission Throttle
Mission Throttle, a Michigan based L3C, is focused on developing, supporting and innovating capitalistic tools to accelerate the evolution of culture, capacity and philanthropic impact. Our vision is to lead and collaborate with others to blend for profit principals to expand for impact scale and concurrently blend the community impact of charitable impact into the for profit culture. We intend to invest in organizations, intermediaries and communities to redefine success, expand impact and encourage social justice. For more information, visit www.missionthrottle.com.