Program-Related Investing Has Yet to Attract Foundations

In study, foundations cite lack of education about PRIs and related costs

Program-related investments can help foundations achieve their charitable goals while generating financial returns, but U.S. foundations have been slow to adopt their use.

A study released Tuesday by the Indiana University Lilly Family School of Philanthropy analyzed key trends in foundations’ use of PRIs between 2000 and 2010, the latest year for which data were available.

PRIs, such as low-interest loans or equity investments, provide opportunities for foundations to go beyond grantmaking to allocate more of their resources to support and assist nonprofits and achieve the foundation’s philanthropic goals while maintaining or growing its assets, the study noted.

This allows foundations to recycle their funds and leverage them for greater impact. In addition, private foundations can count PRIs as part of their required annual minimum payout.

The report, citing IRS data, said the total dollar amount foundations invested in PRIs increased from $139 million in 1990 to $701 million in 2009. The average dollar amount of PRIs made during the period grew from about $666,000 in 2000 to more than $1.5 million in 2009.

But recent trends in PRI use revealed a mixed picture, according to the report. 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% of U.S. foundations each year made PRIs. At the peak in 2004, 137 foundations made PRIs, according to Foundation Center data; by 2009, only 97 foundations did so. The number of PRIs made each year also declined, from 421 in 2004 to 244 in 2009.

The study reported that housing, community development and education received both the highest total dollar amounts and the largest number of PRIs made by foundations between 2000 and 2010. 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 also increased use of equity investments and debt other than loans, such as loan guarantees or loan funds.

The study found that despite growing interest, obstacles to the use of PRIs remained. Foundation leaders reported recurring challenges as they began using PRIs:

  • Lack of information or knowledge about PRIs
  • Lack of expertise in PRI management
  • Potential transaction costs associated with doing PRIs
  • Lack of appropriate opportunities.

Another challenge was how to measure success. The report said foundations generally define success in two ways—programmatic or social success and financial or investment success. It said some considered 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.

The report said peer networks played an important role in overcoming these challenges, supporting and educating foundations in the use of PRIs. It suggested that effective impact investing strategies and implementation plans called upon investment, financial and program professionals within foundations to work together.

“Currently, PRIs are an important tool used by a small segment of the grantmaking community,” Una Osili, director of research for the School of Philanthropy, said in a statement.

“More education and information sharing among grant makers will be needed if PRIs are to gain more widespread use and achieve their full potential.”

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