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The ABCs of PRIs: Program-Related Investments

PRIs can act as a bridge between grant-making and investment opportunities.

Will Senyo, the CEO of Ako Adjei Park Limited in Ghana, had a vision for a locally rooted, globally connected coworking space for innovators and social entrepreneurs. He dreamed of talented young people gravitating to a startup hive in Accra instead of leaving the African country for entrepreneurial enclaves of greater renown.

Ako Adjei Park is part of a global network of nonprofit hubs committed to nurturing social impact. Senyo wanted to attract founders of companies focused on agriculture, healthcare, finance and education who couldn’t afford two years of rent up front, as landlords often demand of commercial tenants. He envisioned renovating a cluster of buildings in a vibrant oceanfront neighborhood just east of Accra’s central business district to provide offices and plug-and-play spaces for coworking, hosting conferences, networking events, and incubation and acceleration programs.

Before he came to IDP Foundation, Senyo was finding it difficult to secure money. His pitches to Ghanaian financiers, who only wanted to hear about proven and already profitable concepts, fell on deaf ears. “If you will step up and be our anchor funder,” he finally said, after revising his projections and circling back to us, “then the others will come.”

In response, we retained experts who helped him tweak his business plan. Although we knew this was a risky investment, we agreed to become his anchor funder with a hard currency debt Program-Related Investment (PRI). This gave him ready capital to expand his business operations. He is well on his way to achieving this expansion, and we are optimistic that he will be very successful and develop a company that will have major positive social impact.

At IDP Foundation, we’re not afraid of risk. In Ghana, we work with Sinapi Aba, a microfinance institution, to provide operators of low-fee private schools with financial literacy and school management training. This training serves to de-risk Sinapi Aba’s provision of loans, which school proprietors can use to improve their schools. School proprietors serving poor families charge such low fees that they often have no collateral and are therefore deemed far too risky for any financial institution to support. They are flagged as huge credit risks. 

However, we’ve been particularly successful in supporting socially responsible revenue-generating companies that don’t rely solely on grants to achieve self-sufficiency, and we’re able to do it by introducing business due diligence and financial rigor to those projects. Think of it as impact investing with philanthropic dollars.

Our preferred vehicle for this approach is the PRI, which is how we classify our low-six-figure loan in Senyo’s project. We are enthusiastic about PRIs because they allow for ongoing participation in a philanthropic endeavor’s capital structure as an alternative to grant-making. With PRIs, we can act more like venture entrepreneurs, making risky investments in the form of debt or equity or some form of blended finance—and with the potential for high returns in terms of social impact.

PRIs can act as a bridge between grant-making and investment opportunities. IDPF started with a grant to Sinapi Aba to fund a pilot of the IDP Rising Schools Program focused on providing loans and support to affordable private schools in Ghana. Then we expanded the program through a series of PRI debt investments that were mostly in local currencies to avoid currency hedging costs to Sinapi Aba.

PRIs are often misunderstood—and they are certainly often overlooked—as a way to provide catalytic philanthropic capital to social entrepreneurs. I believe more foundations would be willing to use them if they better understood how the Internal Revenue Service incentivizes PRIs. Before PRIs came into being through a tax reform act in 1969, foundations were encumbered by the Prudent Investor Rule, whereby foundation money could not be subject to “unnecessary” risk. This effectively prevented philanthropic “investments” in fledgling, mission-oriented ventures.

After the reform, even high-risk investments could qualify as philanthropy, so long as they significantly advanced a foundation's “exempt activities” or charitable intent. Foundations are still required to disburse at least 5% of their assets annually to charity, but now qualifying PRIs—such as equity investments in, say, nonprofit low-income housing projects or low-interest loans to members of economically disadvantaged groups—counted toward that 5% disbursement requirement.

Sometimes it makes sense to provide early money to help projects like Senyo’s entrepreneurial hubs get off the ground. But more often, we see opportunities to use PRIs to help scale existing ventures with promising business models. Edovo, another startup, is a case in point. The Chicago-based social enterprise offers tablet-based learning programs and communication services to incarcerated people. Its platform makes staying in touch with loved ones and support networks easier and more affordable, improves safety within correctional environments, and motivates prisoners to spend more time on educational attainment, like working toward a GED, which reduces recidivism.

Edovo came to our attention through an IDPF portfolio investment in Impact Engine, a venture fund focused on social impact firms. This led to coinvestment opportunities, with IDPF making debt and equity investments classified as PRIs.

PRIs count toward our 5% mandatory disbursement requirement just like any traditional grant would. But imagine that at some point in the future a PRI generated a substantial profit. As the IRS notes, “A potentially high rate of return does not automatically prevent an investment from qualifying as program-related.”

If IDP Foundation were to realize a small gain, say $50,000, on a PRI, we could add that money to the foundation’s corpus, and we’d be looking to boost our PRIs, as the amount disbursed under the 5% rule would increase accordingly. The funds would, in effect, be recirculated to catalyze additional programs and entrepreneurs.

That is what I would call a virtuous cycle. It’s less about giving and more about creating opportunities for direct impact by accelerating the rollout of products and services in underserved communities.

Irene D. Pritzker is president and chief executive officer of IDP Foundation Inc.

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