What are program-related investments for private foundations?

Program-Related Investments (PRIs) are a powerful tool, offering private foundations an additional avenue to leverage their financial resources for the greater social good. According to PRI regulations, foundations are permitted to engage in both debt and equity investments within both for-profit and non-profit ventures, and these investments can be counted towards fulfilling the 5% minimum distribution requirement. However, it's vital to note that the primary purpose of PRIs must be to further the foundation's charitable goals, with income generation playing a secondary role.

When set up and structured correctly, PRIs serve as an alternate method in meeting the 5% distribution requirement, with a notable distinction: the foundation anticipates receiving the invested capital back in the future. Once an investment qualifies as a PRI upon initial assessment, it retains its PRI classification as long as the primary purpose of the investment continues to be the furtherance of the foundation’s charitable purpose. Changes in the investment's terms or form do not alter its PRI status.

The most prevalent method employed by foundations when utilizing PRIs is providing loans at below-market rates to support causes like affordable housing or the preservation of historical buildings and wildlife habitats. Upon repayment of the loan principal, the foundation can reinvest the same capital into other initiatives, creating a virtuous circle of sustainable support. In fact, any returned principal must be re-granted within one year, reinforcing the continuous cycle of positive impact. Furthermore, private foundations have the option to guarantee loans for other organizations that might not meet conventional lending criteria. This approach enables the foundation to advance its philanthropic goals without depleting its endowment, effectively leveraging its financial strength to drive meaningful change. However, it is essential to note that loan guarantees, while impactful, do not count towards fulfilling the 5% annual distribution requirement.

To maximize the impact of PRIs, collaboration and co-investing can be potent strategies. Foundation leaders can unite their resources with other philanthropic entities, pooling expertise and capital to address complex challenges at scale. This collaborative approach enhances the potential for transformative social outcomes. Moreover, the long-term perspective of PRIs calls for a commitment to patient capital and sustained support for chosen initiatives. Achieving significant social impact often takes time, and foundation leaders must communicate their dedication to ongoing efforts and unwavering support.

The following video, produced by the Ford Foundation, provides a great visual summary to how program-related investments work.

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Below are some examples of program-related investments based on those published by the IRS in the Treasury Regulations.

Examples of program-related investments – equity

• Investing in equity shares of a start-up research company dedicated to developing a vaccine for a widespread tropical disease primarily affecting impoverished countries. Other for-profit companies have reduced their research spending for a similar vaccine due to the disease primarily impacting poorer regions, which may limit potential financial returns. Nevertheless, if the vaccine proves successful, there remains a reasonable chance that the start-up company could achieve substantial profitability. Despite the possibility of financial gains, this investment qualifies as a program-related investment because the foundation's main objective is to promote health and well-being, with profit-seeking as a secondary consideration.
• Investing in equity shares of a non-operational fledgling recycling collection business with a business plan focused on gathering recyclable solid waste materials currently destined for landfills. By providing essential seed money, the foundation plays a crucial role in enabling the business to commence its operations. This investment qualifies as a PRI, given that the primary purpose is to combat environmental deterioration, with potential investment returns being of secondary importance. Moreover, the company's medium to long-term performance does not affect its status as a PRI.

Examples of program-related investments – debt

• Offering small commercial loans at below-market rates to underprivileged individuals, enabling them to start small businesses such as roadside food stands. The foundation's primary purpose in providing these loans should be to offer relief to the poor and distressed, rather than prioritizing income generation through a robust loan portfolio. Nevertheless, it is entirely acceptable for the foundation to earn a profit from loans of this nature.
• Extending a commercial loan at below-market rates to a public charity seeking to acquire and renovate a building, creating temporary housing for the homeless. The public charity has not been able to secure conventional financing through banks and other financial institutions and the loan by the foundation is instrumental in making the project happen. This qualifies as a PRI because the primary purpose is to assist the homeless, not to generate a profit from loan interest.

PRIs offer private foundations a valuable means to leverage their financial resources in pursuit of social good. These investments, whether in the form of debt or equity, allow foundations to fulfill their 5% minimum distribution requirement while advancing their charitable goals. Through strategic and purpose-driven PRIs, private foundations can make a lasting difference in the lives of those they aim to serve while maintaining their financial strength.

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