Program-related investments (PRIs) are mission investments made by foundations to generate specific program outcomes. Like grants, PRIs make inexpensive capital available to non-profit or for-profit enterprises that are addressing social and environmental challenges. Unlike grants, PRIs are expected to be repaid, often with a modest, risk-adjusted, rate of return. Once repaid, the money used for a PRI is recycled into new charitable investments.
PRIs emerged as a formal philanthropic activity in response to the Tax Reform Act of 1969. The law cautioned private foundations against making any investment that could imperil its ability to generate funds needed to support its charitable activities. However, under Section 4944, private foundations are allowed to make “program-related investments” that may generate limited or no financial return, provided they met three criteria:
- The primary purpose of the investment is to accomplish one or more of the charitable, religious, scientific, literary, educational and other exempt purposes.
- No significant purpose of the investment is the production of income or the appreciation of property.
- No purpose of the investment is to lobby, support or oppose candidates for public office or to accomplish any of the other political purposes forbidden to private foundations.
In addition to reading on, our Answers to the 10 Most Asked Questions about PRIs, Adapted from Ford Foundation materials, can be found here.
What do PRIs look like?
PRIs are used for all kinds of charitable purposes, including affordable housing, arts, community development, cultural organizations, historic preservation, economic development including entrepreneurship and micro-businesses, charter schools, health clinics, childcare centers, faith-based structures and programs, social services, sustainable agriculture, fisheries and forestry, and wildlife habitat protection. They are used to fund capital projects, bridge loans and loan funds; to support microfinance institutions and promote economic development through loans to small and medium-sized businesses; to help organizations acquire property; to create jobs; and to develop new products or expand services.
PRIs employ different financing methods, such as loans (senior and subordinated), loan guarantees, lines of credit, linked deposits, cash deposits, bonds, equity investments, and other transactions. Depending on the purpose and scope of the investment, a PRI may be relatively simple (such as a working capital loan to non-profit organization or a cash deposit in a community bank) or complex (such as an equity investment in a for-profit enterprise).
Size and Duration of PRIs
PRIs range in size from as little as $1,000 to several million dollars. Generally, the amount of the PRI depends on the need and capacity of the recipient as well as the scope and size of the foundation, and such factors as its tolerance for risk.
There are no limits on the duration of a PRI. PRIs commonly vary from a few months to five years or longer. For example, a foundation may establish a revolving fund to provide short-term bridge payments that are required to be repaid within a few weeks. Conversely, PRIs may be used to support a multi-year community development project or fund a new business that requires long-term, patient capital.
Rate of Return and Repayment
The rate of returned on a qualified PRI is expected, at the time the investment is made, to be below prevailing market rates on a risk adjusted basis. While some PRIs generate no financial return beyond the principle invested, a private foundation generally will also have to consider how it will characterize any gain or income from a PRI for U.S. federal income tax purposes. The return of principal will simply be treated as resulting in an increase in the foundation’s distributable amount for that year. However, income or gain beyond the principal investment will generally have to be specifically characterized as investment income, and subject to tax.
A foundation may fund PRIs by setting aside a portion of its endowment assets, or incorporate them into its grant or program budget. In either case, PRIs count towards the foundation’s annual required payout.