Program-Related Investing

KEY LESSONS

TIPS FOR NOVICE PRI MAKERS:

• Take another look at your grant portfolio - and talk up PRIs to current grantees. Sometimes the best investment opportunities are already in a foundation's grant portfolio. One PRI maker recalled being asked by a grantee for a $500,000 grant to help capitalize a landscaping business that would employ developmentally disabled adults. "Their income projections were reasonable enough to sustain the business, but we didn't want to shoulder all the financial risk with grant money," he explained. Instead, the foundation persuaded the nonprofit to take a $200,000 grant and a $300,000 PRI, thus shifting some of the financial risk to the nonprofit. The loan instilled a measure of financial discipline that might not have accompanied a single, large grant. As it happened, the enterprise didn't even need the full investment. Now, a year later, the landscaping business is ahead of schedule to repay what it borrowed and is looking at new opportunities.
   
• Co-invest with an experienced PRI maker. Partnering with an experienced investor is arguably the best way for a new investor to gain experience. "It's important to realize that you don't have to do this alone," one PRI maker advised. "Over the years, there's an 'involving' practice in program-related investments, which means that it's possible to jointly underwrite deals with other foundations." Co-investors share due diligence, investment analysis, and documentation. Perhaps more important, co-investing gives newcomers a feel for the underlying investment processes and a sense of how they all fit together. "There's an infrastructure to support program-related investing that didn't exist even a few years ago," the investor continued, "but it does now, and that can greatly assist the ability of a foundation to do this work, do it well, and do it with some confidence." One new PRI maker offered an additional tip: Look for a partner organization that's similar to your own, since "private foundations and community foundations are subject to different rules and may have different views and needs."
   
• Invest in intermediaries. Several experienced investors urged novice PRI makers to consider financial or community development intermediaries for their first few deals. Their rationale was the same as for their own investments. "For more traditional grantmakers, getting involved with an intermediary means that making a PRI doesn't need to be that taxing," one investor noted. "I don't think it has to be a brain drain for them." Likewise, novice investors can "buy into" deals that are already vetted and structured by other foundations - technically a co-investment, but one that requires less time and fewer resources than a full partnership.
   
• Break down barriers between program and finance. A final piece of advice from several investors was to look for expertise within your own organization. The finance and investment units at many foundations are valuable sources of expertise, especially at smaller foundations that may not have the resources to hire dedicated PRI staff. "It's possible for a small organization, or someone new to the field, to extend themselves by just thinking through what they want to achieve," one investor said. "Start by asking how far you can get with grant-making analysis and protocols, then add whatever due diligence is needed to make investments." For modest investments and relatively straightforward deals, a foundation's internal expertise is likely sufficient, at least for planning. "For skills you don't possess at the moment, hire a consulting firm," he advised. "Style your engagement so it's not just a one-off experience, but an organizational learning opportunity, so the capacity gets built in-house."
   

TOP PRI MISTAKES

Are there classic pitfalls in making PRIs? You bet! Just be sure that "the picture is not too rosy," a few seasoned PRI funders shared their personal shortlists of common mistakes:

• Taking on too much risk by going it alone. Funding a project independently, rather than collaborating with others or working through an intermediary, can make for hard going if a project turns out to be poorly designed, or the project developer lacks experience, or the assumed market fails to materialize.
   
• Financing too large a stake in a project. If difficulties arise, there's a tendency to turn to the sponsor with the deepest pockets. Or, alternatively, a project can stall and never be completed. Funders and others beyond the PRI maker should have a stake in seeing the project through to completion.
   
• Funding nonprofits on the rocks. Some organizations will try to get loans as a last resort, even when they have no real means for repayment. It's important to look closely at the assumptions presented by PRI seekers, and to avoid throwing good money at a hopeless situation.
   
• Venturing too confidently into the venture capital arena. Unless a PRI maker is dealing with a seasoned venture capital firm, where there's a clear time horizon and path to exit, it's usually harder to recoup the value of a venture capital investment than a straightforward loan. Investors sometime lose a portion of their initial outlays in community development venture capital funds - an outcome that may seem attractive to PRI makers when compared with a grant-funded effort - but it makes sense to align expectations with that reality.
   
• Funding in an unfamiliar field. It's easy to get seduced by a good idea that is "out of program," something that would not be funded with grant money because it doesn't fit. Without knowledge of a field or community, the players, and how the overall markets work, it's hard to be a responsible investor.
   
• Not building in mechanisms that raise flags when trouble approaches. Many foundations have learned the hard way to manage risk by including covenants that specify minimum financial benchmarks that must be maintained by the borrower during the life of the loan. Also, if the project doesn't require the entire amount upfront, some PRI makers choose to disburse the funds in stages - especially if the borrower is new or the proposition risky.