In recent years, program related investment (PRI) has gained increasing attention as an innovative financing tool to drive social impact. It refers to impact investments made by foundations to nonprofits and social enterprises, with an expectation of return on capital. PRI allows foundations to recycle capital for charitable purposes while achieving social objectives. This article will discuss how PRI can be utilized to address social issues and catalyze resources for public welfare.
PRI is considered a ‘win-win’ approach, aligning a foundation’s financial and social goals. On one hand, it provides patient and affordable capital to organizations creating social value. On the other hand, it expands the foundation’s balance sheet for further mission-driven activities. PRI has moved from an experiment to a mainstream practice adopted by leading foundations globally, including the Rockefeller Foundation which coined the PRI concept in the 1970s.
However, PRI remains an evolving landscape with many issues to explore. This article will share insights into PRI mechanisms, management practices, and innovative applications, helping social investors use it more effectively to drive meaningful and sustainable change.
PRI fills the gap between commercial investment and pure philanthropy
Historically, foundations are restricted to making grants due to regulations on jeopardizing investments. However, pure grants are insufficient to address complex social problems sustainably. PRI emerges as an intermediate approach, offering financing to drive social outcomes while targetting some financial return.
For nonprofits and social enterprises, PRI provides an alternative to commercial capital which may be inappropriate for their work. The below-market cost and customized terms allow them to develop products and services benefiting disadvantaged communities.
From the foundation’s perspective, PRI can be managed to balance financial and social performance. It provides more flexibility compared to grants by allowing recycled use of funds. With domain expertise, foundations can provide hands-on support beyond just capital. This combination of patient capital and active engagement is conducive for solving entrenched issues.
PRI mechanisms should align with investment strategy and theory of change
A foundation’s PRI practice must be grounded in its vision, mission and investment policy. The PRI mechanism should clearly articulate how it drives impact and transforms systems, based on context-specific theories of change.
For instance, the Rockefeller Foundation’s Zero Gap portfolio deploys PRI to test and scale innovative finance instruments, catalyzing new capital flows towards the SDGs. The goal is to demonstrate replicable models that can unlock larger public and private investments. By targeting additionality and scale, the PRI approach is differentiated from traditional grant-making.
To maximize impact, PRI design should facilitate capital stacking from multiple sources, not just foundation funding alone. Blended finance allows integrated use of concessionary tools to de-risk transactions for commercial investors. Robust PRI mechanisms with demonstrable track records can potentially transition to self-sustaining market-based solutions.
PRI management practices combine financial diligence with impact accountability
While deploying PRI, foundations must balance social purpose with financial stewardship. This begins by assessing the social issue and desired outcomes, then setting expectations on metrics and reporting.
Impact due diligence examines the potential reach, depth and duration of impact. Investment due diligence evaluates the financial viability, risks and projected returns. Ongoing monitoring and support ensures accountability on both dimensions.
For example, the Rockefeller Foundation’s impact management system tracks progress against milestones, analyzes data trends to improve decisions, and validates impact through independent evaluations.
Success requires dedicated staff and supportive culture, to pilot iterative solutions while navigating ambiguity. Leadership must actively empower innovation, incentivize cross-team collaboration, and accept risks inherent in building new fields.
PRI can be customized across asset classes to drive capital
Innovative foundations are tailoring PRI across different asset classes to meet specialized needs. While below-market rate loans are common, some examples include:
– Loan guarantees to unlock financing from banks reluctant to serve certain communities.
– Equity-equivalent investments to strengthen CDFI balance sheets and enable growth.
– Support to funds that provide credit to underserved sectors like affordable housing and education.
– Securitization to bundle loans for liquidity and exit opportunity.
– Credit enhancements like first-loss reserves to mitigate risk for co-investors.
Rather than a one-size-fits-all approach, foundations can deploy various PRI tools to build resilience of investees and catalyze outside capital.
This diversification allows customized solutions, but also requires enhanced diligence and governance. Tradeoffs between depth of impact and breadth of reach should align with strategic goals.
In summary, program related investment is an important innovation allowing foundations to drive social change in a financially sustainable manner. By providing flexible financing to social sector organizations, PRI bridges the gap between traditional grant-making and commercial investment. With rigorous management, PRI can enhance impact and accountability. Looking ahead, creative applications of PRI must continue to evolve alongside collaborative efforts to grow the impact investing field.