As a collaborative of foundations and financial institutions dedicated to improving the lives of low income people in American cities, Living Cities believes that addressing social and economic disparities requires that we harness all of our financial resources. Grants alone will never be enough to revitalize our communities and prepare people for and connect them to opportunity.
Fortunately, for foundations interested in having the greatest possible impact on the issues they care about, grants are not the only tool at their disposal. Another tool is Program-Related Investments (PRIs) which are investments (such as loans) made by foundations to support charitable activities. Unlike grants, PRIs provide foundations a return on their investment through repayment and interest on loans or return on equity, allowing the foundations to recycle their resources.
PRIs are impact investments, which are investments intended to generate social or environmental benefits as well as financial returns. Impact investors differ in their priorities, return expectations and risk tolerances. PRI investors stand out for their willingness to accept lower financial returns and/or higher risk for the achievement of targeted social outcomes. As a result, PRI capital can sometimes be the critical ingredient needed to induce more financially motivated investors to put their capital to work in socially beneficial ways by buffering risk or enabling others to receive greater returns.
A new report by the Lilly Family School of Philanthropy at Indiana University, Leveraging the Power of Foundations: An Analysis of Program-Related Investing analyzes the use of Program-Related Investments by foundations over the period from 2000-2010.
Several findings in the study stand out:
- Fewer than 1% of foundations make PRIs.
- Even in 2004, the peak year of PRI activity in terms of the total number of PRIs, only 137 foundations made PRIs. By the end of the decade, the number of PRI providers had fallen to about half that number, with fewer transactions completed (although average dollars per transaction had grown).
- Housing, community development and education are the three areas receiving the most PRI support.
- Barriers to PRI-making include lack of expertise and transaction costs. The report suggests these barriers can be overcome through the use of advisers and participation in peer networks such as the Mission Investors Exchange.
Percentage of Foundations Making PRIs
1% Fewer than 1% of foundations make PRIs
Some of the members of Living Cities pioneered the use of PRIs as early as the 1960s. The report reveals that seven of our members: the Ford Foundation, the John D and Catherine T. MacArthur Foundation, the Prudential Foundation, the Bill & Melinda Gates Foundation, the Annie E. Casey Foundation, the Kresge Foundation, and the Cleveland Foundation, together accounted for 25% of total PRI dollars invested between 2000-2010.
Since 2008, the Living Cities Catalyst Fund has pooled PRIs from nine of our members to invest in affordable housing, health clinics, grocery stores and small businesses. Created at a time of economic crisis when philanthropic resources had been hit hard by the stock market, the Catalyst Fund brought together relatively new PRI makers with industry veterans to deliver capital to underinvested places including Detroit, Cleveland, Newark and Baltimore.
Over the past five years, we have seen the critical role that Community Development Financial Institutions (CDFIs) can play as intermediaries that take in PRIs and other forms of investment and deploy them in disadvantaged communities. We have also seen that many communities lack the institutions and processes that are needed to be able to attract and deploy capital for the public good.
Living Cities believes that through PRIs and impact investments generally, foundations can help to ensure that capital flows in ways that create opportunity and prosperity for all. By supporting the spread of PRIs to more foundations, by growing the dollar amounts deployed through PRIs and by encouraging foundations to innovate with PRIs by investing in equity as well as debt and by accepting longer terms and more flexible loans, we believe that philanthropy can magnify its impact on society well beyond what can be achieved through grants.
This post originally appeared on June 3, 2013.