Program

Related Investments in Southeast Michigan

Use, Application, and Challenges

Through a partnership between the Green Garage in Detroit and the University of Michigan Social
Venture Fund, graduate students from the Steven M. Ross School of Business, Gerald R. Ford
School of Public Policy, and University of Michigan Law Schools at the University of Michigan
studied the use of PRIs in the current impact investing climate, particularly in Southeast Michigan.
This report contains challenges and opportunities identified through primary and secondary
research in the PRI space.

Sarah-Jane Caban, MBA 2014; Marcus Hoffman, J.D. 2015

Kule Killebrew MBA/MPP 2016; Katie Malkin, MBA/MPP 2014
Sarah Mostafa, MPP 2015; Perry Teicher, MBA/J.D. 2015
May 2014

Program Related Investments in Southeastern Michigan: Use, Application, and Challenges
Independent Research Study Conducted by Graduate Students at the University of Michigan

Table of Contents

Research Methodology .......................................................................................................................... 3

Background ............................................................................................................................................ 3
PRI Challenges ........................................................................................................................................ 5
Key PRI Findings ................................................................................................................................... 11
Best Practices and Recommendations for Expanding PRI Use ............................................................... 13
Future Trends and Research ................................................................................................................. 18

The research team would like to particularly thank advisor Professor Uday Rajan for his patience, perspective, and support
along with Bob Weins and the Green Garage for their hospital, probing questions, and guidance. In addition, the team would
like to thank everyone from the variety of foundations, non-profits, and other organizations who took the time to participate
in the study.

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Research Methodology
The team employed a combination of secondary and primary research methods to carry out our investigation. A
literature review of existing PRI studies provided a foundation of initial knowledge and helped to answer the first research
question: How successful are PRIs in Southeastern Michigan? The team then conducted interviews with industry experts to
identify best practices, challenges, and trends to inform recommendations for prospective practitioners [in Southeastern
Michigan].

Eleven interviews were completed with representatives of foundations of a range of asset sizes, including legal staff,
program staff, and members of foundation investing teams. The interviews were primarily conducted by phone, and lasted 30-
60 minutes. A list of participating organizations is provided in Appendix A, and a list of interview questions is provided in
Appendix B. Secondary research sources are referenced through the document in footnotes.

Background
Program-related investments are those in which:
1. The primary purpose is to accomplish one or more of the foundation's [tax-] exempt purposes,
2. Production of income or appreciation of property is not a significant purpose, and
3. Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.
1
Definition of PRIs from the Internal Revenue Service

Brief History of PRIs: Ford Foundation First Steps

2
The Ford Foundation (Ford) is often credited as one of the early pioneers of Program Related Investments (PRIs).
Currently the second largest private foundation globally with over $11 million in assets, the Ford Foundation has nearly 80
years of experience in charitable giving and foundation management. Through a partnership with John Simon, the President of
the Taconic Foundation, the Ford Foundation influenced the development of the legal and economic structure that was
3
codified in the Tax Reform Act of 1969. These efforts opened the door for foundations to extend beyond donations to achieve
their missions through the use of a new tool, the PRI.
The introduction of the PRI, however, came with both legal and programmatic challenges. As an innovative social
finance mechanism without a home solely in the investment or program side of the foundations work, Fords PRI activities sat
4
with the vice president for administration. Initially, the $10 million allocated by Ford to start PRIs took a form similar to
venture capital investments--although without the potential of immense upside. Due in large part to an undeveloped

1
IRS, http://www.irs.gov/Charities-&-Non-Profits/Private-Foundations/Program-Related-Investments
2
History of PRIs excerpted from The Ford Foundations 1991 Report, Investing for Social Gain; Reflections on two Decades of
Social Investments, available at https://www.missioninvestors.org/system/files/tools/history-of-pris-ford-foundation.pdf (25
Apr. 2014).
3
Id.
4
Id.

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investment strategy, and a lack of intermediaries to source recipients, PRIs were initially affected by inefficiencies and a lagging
organizational structure to support them. These first PRI funds, however, served as an early example of a foundation exploring
alternatives to traditional philanthropic models.

Early Foundation Structures

In 1980, Ford moved its PRI portfolio to the program side, rather than the investment side, of its worksetting a
precedent that would later be replicated by other foundations. While PRIs were initially conceived as a way to stretch limited
5
funds, this new financing form was not viewed as a revenue center. Instead, foundations began to explore PRIs as a method
for attracting additional capital from third parties (i.e. donors, investors, and lenders), and helping program dollars go further
through repayment and recycling. Locating PRIs within the program scope of work further perpetuated the view of PRIs as a
program tool instead of an investment vehicle.
6
The Tax Reform Act of 1969 also encouraged foundations to view PRIs in the perspective of a program tool. One goal
of the Act was to allow foundations to count PRIs toward the annual 5% mandatory payout of the foundations corpus. As a
result, foundations viewed PRIs as a way to further [their] charitable purposes, [not to] preserve capital [or] . . . produce
7
market-oriented returns. Under this rubric, it would make little sense to place control of these investments under investment
officers, given the financial focus of this role.

Types of PRI Projects and Financing Structures

As a program tool, PRIs have been consistently applied toward specific focus areas since their creation: real estate
community development projects, revolving loan funds targeted at low margin loans to nonprofits, gap financing, and health
8
and social services related activities. As foundations became more comfortable with PRIs in the early 2000s, many began to
explore the use of new PRI financing instruments, such as loan guarantees, other forms of credit enhancement, broader
9
financing partnerships, an expanded loan portfolio focus, and equity investments.
The composition of PRIs varies across foundations and is dependent upon a number of factors including the size and
organizational structure of the foundation. Our research suggests that low-margin loans to nonprofit recipients are the most
common form of PRIs, although equity-based investments in for-profits are becoming more common. For example, of the 30%
of the Ford Foundations equity-based PRIs, a considerable amount are made in part with the objective of showcasing
innovative solutions and products of early stage startups. As another example, the Packard Foundation supported its
conservation objective through leveraging private investor money to build a local market niche in the sustainable seafood
industry. These examples highlight the variety of PRIs in both scope and type, with greater diversity existing among the larger,
pioneering foundations in the PRI space.
While foundations are exploring new methods to unlock capital for social innovation and community development,
the generally conservative structure and focus of many foundations keep most of the $646.1 billion of assets held by
10
foundations isolated to endowments and non-mission investments. Even with expanded scope and experience in managing
PRI portfolios, foundations overall have made relatively minor use of this financing strategy. For example, the foundations that
11
have been engaged with PRIs longest and most aggressively have used only around 2% of their total assets for PRI portfolios.

5
Id.
6
H.R. Res. 13270, 91st Cong. (1969) (enacted).
7
http://www.rwjf.org/content/dam/web-assets/2002/01/program-related-investments
8
Id.
9
Id.
10
Id.
11
Id. (including the Ford Foundation, John D. and Catherine T. MacArthur Foundation, and the Irvine Foundation).

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A Note Regarding PRIs vs. MRIs12:
In light of the growing use of two new types of
social investment tools with similar nomenclature, we
take a moment here to clarify the distinction between
Program Related Investments (PRIs) and Mission Related
Investments MRI(s). Mission Related Investments refer to
investments made in organizations (usually for-profit
companies) or managed funds that are aligned with a
Foundations mission or are otherwise deemed to be
socially and/or environmentally responsible actors. These
investments typically deliver returns at or near market
rates. They are distinct from PRIs in the following key
ways: (1) They are deployed from the 95% endowment corpus, as opposed to the 5% program budget (although PRI
deployment outside of the 5% budget is growing). (2) MRIs reflect an investment philosophy, rather than a distinct, regulated
investment tool. As such, they are not subject to the same legal standards as PRIs, including mission alignment, and are
typically not as closely aligned with a Foundations specific mission. (3) MRIs generally, although not always, are structured as
equity versus debt instruments, and deliver higher returns than PRIs. (4) MRIs are managed by a foundations investment staff,
while PRIs are most often managed by a foundations program staff (often with advising by the investment team or other
financial experts). (Additional distinctions between PRIs and MRIs are outlined in Exhibit 1).

PRI Challenges

13
The use of PRIs has grown over the last decade, however many foundations still remain hesitant to enter the PRI space.
We found that the primary issues behind the conservative approach of foundations toward PRIs were rooted in the following
concerns:

Fear of legal issues with the IRS;
Lack of experience managing below-market social investments;
Limited capacity and patience for the work required to manage PRIs
Difficulty sourcing deals and finding desirable mission-aligned targets
Board resistance

12
ttp://media.journalofaccountancy.com/JOA/Issues/2008/07/cap_exhibit1.gif
13
Supra note 16.

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Reducing these barriers is a key step to increasing the use of PRIs among foundations. We address each issue below in
more detail, add Michigan-specific context, and propose solutions for foundations and potential recipients of PRIs.

Fear of Legal Issues with the IRS

As a means of deterring foundations from using their funds for investments, rather than for the charitable purposes for
which they have received 501(c)(3) status, the IRS, under IRC 4944, imposes taxes on investment activities that jeopardize the
foundations charitable purpose. It is under this section of the tax code that PRIs are exempted from being deemed a
jeopardizing investment:

(c) Exception for program-related investments. For purposes of this section, investments, the primary purpose of
which is to accomplish one or more of the purposes described in section 170(c)(2)(B) [e.g., charity], and no significant
purpose of which is the production of income or the appreciation of property, shall not be considered as investments
14
which jeopardize the carrying out of exempt purposes.

In order for a foundations PRI to be counted toward its qualifying 5% charitable-purpose disbursement, three
conditions must be met: 1) the primary purpose is to accomplish one or more of the foundation's exempt purposes, 2) the
production of income or appreciation of property is not a significant purpose, and 3) influencing legislation or taking part in
political campaigns on behalf of candidates is not a purpose. The three conditions, however, are not as clear as foundation
managers would prefer; especially since the foundation managers can be held personally liable for penalties on a jeopardizing
15
investment. The regulation clarifies that the primary purpose requirement is met if it significantly furthers the
accomplishment of the private foundation's exempt activities and if the investment would not have been made but for such
16
relationship between the investment and the accomplishment of the foundation's exempt activities. To provide further
guidance, the IRS has furnished nineteen examples of qualifying and non-qualifying PRIs. A few of these examples are below:

Qualifying PRI - Example 3. X is a small business enterprise located in a deteriorated urban area and owned by
members of an economically disadvantaged minority group. Conventional sources of funds are unwilling to provide
funds to X at reasonable interest rates unless it increases the amount of its equity capital. Consequently, Y, a private
foundation, purchases shares of X's common stock. Y's primary purpose in purchasing the stock is to encourage the
economic development of such minority group, and no significant purpose involves the production of income or the
appreciation of property. The investment significantly furthers the accomplishment of Y's exempt activities and would
not have been made but for such relationship between the investment and Y's exempt activities. Accordingly, the
purchase of the common stock is a program-related investment, even though Y may realize a profit if X is successful
17
and the common stock appreciates in value.

Qualifying PRI - Example 6. X is a business enterprise which is owned by a nonprofit community development
corporation. When fully operational, X will market agricultural products, thereby providing a marketing outlet for low-
income farmers in a depressed rural area. Y, a private foundation, makes a loan to X bearing interest at a rate less
than the rate charged by financial institutions which have agreed to lend funds to X if Y makes the loan. The loan is
made pursuant to a program run by Y to encourage economic redevelopment of depressed areas, and no significant
purpose involves the production of income or the appreciation of property. The loan significantly furthers the
accomplishment of Y's exempt activities and would not have been made but for such relationship between the loan

14
26 U.S.C.A. 4944(c) (West 2006).
15
26 U.S.C.A. 4944(a)(2), (b)(2).
16
26 C.F.R. 53.944-3(a)(2)(i) (emphasis added) (establishing that the primary purpose must align with the foundations specific
charitable purpose).
17
26 C.F.R. 53.49443(b) (West 2014).

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18
and Y's exempt activities. Accordingly, the loan is a program-related investment.

Non-qualifying PRI - Example 7. X, a private foundation, invests $100,000 in the common stock of corporation M. The
dividends received from such investment are later applied by X in furtherance of its exempt purposes. Although there
is a relationship between the return on the investment and the accomplishment of X's exempt activities, there is no
relationship between the investment per se and such accomplishment. Therefore, the investment cannot be
considered as made primarily to accomplish one or more of the purposes described in section 170(c)(2)(B) and cannot
19
qualify as program-related.

Many of the foundations we spoke with expressed deep concerns that an IRS investigation into PRIs could trigger an IRS
audit, and might subject the foundation and the managers to penaltiesmost seriously the loss of their tax-exempt status.
Therefore, we believe that foundations often take an extremely conservative read of the tax code, and tend to avoid PRI
opportunities that do not clearly pass predetermined IRS legal hurdles. As a result, legal issues have hindered the broader
usage of PRIs.

PRI legal qualification tactics

Foundations employ a variety of tactics to assess whether a distribution will qualify as a PRI or be considered a
jeopardizing investment.

PRI recycling. One large foundation mentioned the value of its veteran team, which has experience making multiple
PRIs over the years. Through the connections and vast network of recipients with whom the team has previously worked, the
foundations team is able to align the foundations charitable purpose with similar projects for similar recipients. In a sense, the
foundation recycles PRIs over and over again. By working with similar projects and recipients, the team has developed a
specialty through which it is able to be more innovative. This experience has allowed the foundation to grow more comfortable
with PRIs, so that it does not expend a great deal of effort ensuring that each PRI will qualify.

Private letter rulings. Private letter rulings (PLRs) from the IRS and legal opinions from law firms are also utilized by
many of the foundations we interviewed. Unfortunately, PLRs can take a long time to receive, and the filing fees and legal fees
20
required to request a PLR are so prohibitively expensive that smaller foundations are unable to request them. PLRs are also
fact-specific, so foundations cannot rely on a PLR as precedent for future PRIs.

Legal opinions. In addition to PLRs from the IRS, many foundations hire inside or outside counsel to provide them with
a legal opinion of the likelihood that a distribution will qualify as a PRI. Legal opinions do not provide the foundation with the
same legal certainty as a PLR, but for smaller PRIs, legal opinions are the safest viable alternative to a PLR. With the additional
legal costs that foundations incur ensuring that a PRI will not be deemed a jeopardizing investment, it is no wonder why so
many foundations are reluctant to make PRIs. For this reason, there have been many attempts to consolidate the process for
determining whether a project is in line with a foundations purpose.

Many of the people we spoke with discussed the need for a more surefire method for qualifying PRIs. Some had
hoped that the L3C structure would serve as a safe harbor entity form for PRIs, but the IRS seems firm in its position that a
recipients L3C status will not be considered a sufficient condition. Recently, the Philanthropic Facilitation Act (PFA) has been

18
Id.
19
Id.
20
See INTERNAL REVENUE BULLETIN: 2014-1, APPENDIX A: SCHEDULE OF USER FEES (A)(3)(c)(i) (Jan. 2, 2014), available at
http://www.irs.gov/irb/2014-1_IRB/apa.html#d0e4776 (listing the filing fee for a PLR as $6,900).

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introduced as a solution for creating a streamlined voluntary application and approval process that determines if the applicant
21
organization meets the standards for a PRI. However, it is uncertain whether the bill will be passed, and one person we
spoke with in the Washington D.C. legal and social enterprise community doubts that it will be passed. All of this reflects the
underdeveloped legal regime surrounding PRIs upon which so many of our interviewees remarked.

Recommendations for improving the PRI qualification process

A few of the interviewees presented their ideas for developing a better PRI ecosystem. One idea was to get the large,
well-known foundations to take on a herd mentality that would allow them to set the course for PRIs. By acting in concert to
develop typical forms of PRIs, these foundations could set standards for smaller foundations to follow. Another idea was to
create a database of recipient information that would be categorized, so that foundations could easily choose recipients for
PRIs that would conform to the foundations charitable purposes. The recipients in the database would be certified under
criteria that meet foundations purposes, in order for the foundations to entrust that a PRI made to that recipient would not
constitute a jeopardizing investment. Lastly, it was recommended that intermediaries, acting as liaisons between foundations
and recipients (and often as official underwriters and deal negotiators play a more pivotal role in guaranteeing foundations
that their PRIs will qualify. By conducting a foundations PRI due diligence, the intermediary would help assure the foundation
that the projects purpose was in accordance with the foundations mission.

Other PRI legal concerns

Once a PRI has been made, some foundations worry that the IRS may audit the PRI and find it to be out of compliance
with the second criterion for qualifying a PRI if it exceeds market-rate returns. This fear is not well founded, however, as the
IRS does allow for some PRIs to earn higher returns: If an investment incidentally [emphasis added] produces significant
income or capital appreciation, this is not, in the absence of other factors, conclusive evidence that a significant purpose is the
22
production of income or the appreciation of property. Therefore, PRIs are not restricted to below market rate returns, and
above market rate returns do not render a PRI ineligible. The IRSs main concern is that the return that a PRI earns is not a
significant reason for making the PRI.
Another fear faced by foundations, after a PRI has been assigned, is the issue of expenditure responsibilities. Under
23
IRC 4945, the IRS is authorized to penalize foundations for making taxable expenditures. This includes PRIs made to a
24
non-charitable organization. In order to avoid the penalties, foundations must exercise expenditure responsibilities, which
require a foundation to exert all reasonable effort and to establish adequate procedures:

(i) To see that the grant [PRI] is spent solely for the purpose for which made,
(ii) To obtain full and complete reports from the grantee [recipient] on how the funds are spent, and
25
(iii) To make full and detailed reports with respect to such expenditures to the Commissioner.

While some of the foundations we spoke with make use of covenants to buttress their monitoring efforts, these
responsibilities are yet another purpose that intermediaries can serve. By aligning projects with a foundations mission,
carrying out the expenditure responsibilities, and generally administering the making of a PRI, intermediaries could be the key
link in a legal framework that fosters broader use of PRIs. As we learned, however, foundations and their managers must be

21
AMERICANS FOR COMMUNITY DEVELOPMENT, ANNOUNCING THE PHILANTHROPIC FACILITATION ACT (H.R. 2832) 1 (2013).
22
Program-Related Investments, INTERNAL REVENUE SERVICE (last reviewed or updated Apr. 25, 2014),
http://www.irs.gov/Charities-&-Non-Profits/Private-Foundations/Program-Related-Investments.
23
26 U.S.C.A. 4945 (West 2006).
24
26 C.F.R. 53.49455(b)(4) (West 2014).
25
26 C.F.R. 53.49455(b)(1).

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able to trust intermediaries, since foundations are the ones to bear the ultimate penalty for making a jeopardizing investment.
With foundations eager to make PRIs that can possibly produce a return, but hesitant to take on the responsibilities of assuring
that a PRI will qualify, intermediaries have the opportunity to mitigate that risk and earn a return.
Trust can be compromised when Foundations have limited means for influencing the activities and priorities of
intermediaries. For example, one small local foundation we spoke with described a PRI that was reclassified as an MRI due to
concerns about control over an intermediary and ultimate IRS qualification. The foundation had structured a $250,000 PRI to a
housing development fund at what it considered to be a concessionary interest rate of 5%. The foundations auditors,
however, reclassified the PRI as an MRI, fearing that it might not fully satisfy the IRSs first criterion of mission alignment. The
housing development fund was serving as a PRI intermediary, and the foundation had limited means for ensuring that a
sufficient percentage of the re-leveraged funds would be allocated toward affordable housing, and not toward market-rate
housing. The auditors took what the foundation representative considered to be very a conservative, precautionary approach
in making the reclassification as an MRI rather than a PRI.
Despite the pervasive fears about IRS regulations, we were not able to uncover any actual examples of IRS audits
resulting in PRI disqualifications or associated penalties, nor could the foundation legal experts we consulted with identify any
26
such examples. It is unclear whether the lack of current audits is a direct result of foundations conservative approach toward
making PRIs, or instead reflects a hesitation on the part of the IRS to undertake such investigations. It will be instructive to see
whether the rate of audits increases along with the rate of PRI growth and potential increase in more risky PRIs in future years.

Lack of Experience Managing Below-Market Rate Social Investments

Once a foundation has cleared the legal hurdles necessary to proceed with a PRI, other barriers can arise. In addition
to fulfilling all of the reporting and mission-related requirements of traditional grants, PRIs must also fulfill minimal financial
requirements. Foundation staff often lack experience in structuring and managing such investment deals. Staff are required to
conduct financial due diligence, structure the investment by choosing between a number of investment vehicles, set up
27
financial reporting in addition to social reporting, and potentially restructure a failing investment. Management of PRIs also
requires foundation staff to maintain longer-term relationships with recipients, including ongoing reporting, as PRIs are often
structured over 5-10 years, versus the 1-3 year timeline typical of most grants. As Peter Goodwin and Marco Navarro, authors
of a PRI report for a 2002 Robert Wood Johnson Foundation Anthology, outline the issue, foundations are not generally set up
28
to operate as banks, but PRIs put them in the position of acting as bankers.
In order to complete this process accurately and responsibly, foundations need staff members who have these
banking skills. Larger foundations often put together investment teams or PRI units among their staff in order to draw upon
the combined expertise of program staff and investment staff to source, structure, and manage PRIs. Smaller foundations,
however, are often reluctant to pull limited staff away from their traditional work to explore the new frontier of PRIs. As a
result of this divide, we see fewer small foundations participating in the PRI space; foundations with less than $50 million in
29
assets only accounted for approximately a third of all PRIs completed in 2010.
Both large and small foundations, however, can benefit from increasing their knowledge base and expertise regarding
PRIs. Foundations have a few options to obtain the expertise needed to succeed with PRIs. The first option is to outsource the
process to consultants or intermediaries. The second is to build capacity among current staff by training program staff on
investments, pulling investment staff and program staff together on PRI teams, or drawing upon investment experience from

26
See Ashoka, Why Program-Related Investments Are Not Risky Business, FORBES (Feb. 21, 2013, 11:00 AM),
http://www.forbes.com/sites/ashoka/2013/02/21/why-program-related-investments-are-not-risky-business/.
27
Carlson, Neil. Skills and Strategies for New PRI Funders.
28
Goodwin, Peter and Navarro, Marco. Program-Related Investments. To Improve Health and Healthcare. Robert Wood
Johnson Foundation Anthology. 2002.
28

29
Lawrence, Stephen. Doing Good with Foundation Assets: An Updated Look at Program Related Investments. Rep. New York:
Foundation Center, 2010. Print.

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the foundations board. Foundations can also choose to pursue a mix of both options and begin by working with external
30
consultants, learning from the experience, and then building internal staff capacity throughout the process.

Limited Capacity and Patience for the Work Required to Manage PRIs

In addition to a lack of investment experience, foundations often have limited physical capacity to manage PRIs. As
discussed above, PRIs require more time and effort than grants in their sourcing, structuring, and management. A small
community foundation noted that the due diligence process when exploring its first PRI took nearly 8 months to complete. At
the end of this process the foundation decided not to go forward with the PRI and, although they had learned a lot from the
31
process, felt as though the next PRI would also take a considerable time commitment to conduct.
As a result of the additional hours and expertise required (often external), PRIs are significantly more expensive to
administer than traditional grants. Especially for small foundations with limited internal PRI experience, PRI initiation and
32
administration can be perceived as prohibitively expensive. Small foundations specifically point to the transaction costs,
which include the expenses associated with due diligence and investment-monitoring, legal advisory, and documentation, as
33
barriers to development of PRI programs.
Due to these added expenses, foundations are often hesitant to make PRIs in small loan amounts, rightly fearing that
the additional administration costs would exceed the value of the return. For example, a member of the social investment
34
team at a large Midwest-based foundation stated that he would not like to spend his days underwriting $50,000 loans.
Instead, the foundation takes the approach of distributing large PRIs to community development financial institutions (CDFIs)
who act as intermediaries with the internal capacity to underwrite smaller loans to third party recipients.
The high costs of administration also explain why many smaller foundations have been hesitant to enter the PRI
market. With their modest asset bases, small Foundations typically make relatively few grants in small dollar amounts through
the work of just a few specialist staff members. These Foundations would therefore not be able to achieve the scale economies
required to clear the hurdle at which the administration costs would justify the low-interest rate returns of PRIs.

Difficulty Sourcing Deals and Finding Desirable Mission-Aligned Targets

Foundations can vary significantly in their ability to source desirable PRI opportunities. Several factors explain the
variance, including the size of the Foundation, mission, and even the geographic regions in which a Foundation operates.

Deal sourcing is an issue for small foundations.

Small foundations with small asset bases often have a difficult time finding desirable PRI recipients--several
representatives of small location foundations mentioned deal sourcing as a major obstacle to pursuing PRIs. This is due to their
limited internal capacity for deal sourcing, and their typically lower visibility among grant seekers (e.g. non-profits). Small
foundations simply dont have as many people knocking on their doors and asking for the sums of money that would be
appropriate for a PRI as do larger national foundations. If they did, this could actually prove problematic, as Foundations often
have to further expand their deal-sourcing capacity following initiation of a successful PRI program, since any realized returns
must be redistributed as additional grant dollars or new PRIs. Small foundations typically dont have the resources to expand
staff capacity quickly.

30
Carlson, Neil. Skills and Strategies for New PRI Funders.
31
Hajra, Neel. "Ann Arbor Community Foundation - Experience with PRIs." Personal interview. 1 Feb. 2014.
32
2006 Program-Related Investments Conference. Case SI-85. Stanford Graduate School of Business. 30 Mar. 2006.
32

33
Ibid.
34
Personal communication, Kellogg Foundation (Apr. 2014).

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Finding financial intermediaries can be a challenge for large foundations.

Large national foundations usually experience high demand among grant seekers and have relatively strong internal
capacity for deal sourcing, and thus have a broader pool of potential PRI recipients. Most of the representatives of large
foundations with whom we spoke indicated that deal flow volumes were not an issue, and that they did not anticipate deal
flow to become a problem in the future. In sourcing attractive PRI candidates, their greatest challenge was identifying capable
intermediaries such as CDFIs to actually underwrite and administer the deals. This is particularly problematic in certain areas of
the country with underdeveloped CDFI markets. In these areas, some foundations are working to build capacity among existing
CDFIs and create conditions to enable new CDFIs to enter the ecosystem.

Grantees can be reluctant to accept PRIs

Traditional recipients of grants can be reluctant to accept PRIs for many of the same reasons that foundations are
cautious of deploying them. PRIs require recipients to take additional time and effort to apply for and manage. Recipients also
need some degree of financial knowledge and experience to manage the investments. PRI applications alone can require
proposals that go well beyond standard grant submissions to include detailed business plans, financial projections,
identification of other funding sources, collateral or the rights to assignment of acquired collateral, and (for intermediaries) a
status report on current loan portfolios. Potential recipients will likely require professional advisory in negotiating the terms
35
and conditions of the PRI.
As a result of these issues, the primary recipients of PRIs tend to be organizations that have the financial skills to
handle investments, such as CDFIs. These organizations tend to have an economic development focus, making loans for local
real estate projects and small business development initiatives. Another common recipient is schools, most notably charter
management organizations (CMOs). Charters often have track records of managing both public and private funding streams,
and they are especially attractive to Foundations due to the financial predictability of annual per-student public funding
allocations. If a foundation does not typically work with these types of recipients and works only with non-profits accustomed
to receiving grants (e.g. human service organizations), they will be more likely to encounter grantee resistance and have
difficultly identifying targets with the financial capacity to manage PRIs.

Board Resistance

As governing bodies, foundation boards play a critical role as gatekeepers influencing decisions to implement PRIs.
Failure to receive board approval is a primary barrier limiting broader PRI implementation, as a program officer at one of the
nations Foundations admitted: Our old CEO took a run at the Board twice to try to do PRIs, and they resisted.
Since PRIs are often seen as a relatively niche and underutilized grant-making vehicle, board members are likely to
have varying degrees of familiarity with the tool, and may harbor misconceptions about the vehicle. Broadly speaking,
foundations with longer-serving board members initiated under a more traditional philanthropy model, as well as those whose
members come from more traditional, corporate backgrounds (e.g. large corporations with their own affiliate foundations), are
likely to take a more conservative approach toward grant-making and, thus, be somewhat unfamiliar with --and potentially
resistant toward--PRIs.
These boards justify resistance along a range of ideological and practical lines. Some boards that lack familiarity with
the 40+ year history of PRIs may see the tool as merely trendy. Other boards rigidly ascribe to the so-called Prudent Man
theory of investing. Boards with this mentality often perceive a bright line between market-rate corpus investments and grant-
making activities, and fear that the blurring of such lines could position foundations as bank-like institutions taking on
unnecessary--and potentially unsustainable--risk and leverage. The boards that perceive strong distinctions between investing

35
Ibid.

11
May 2014

and grant-making are also more likely to define the role of foundations as being long-term sources of grant capital operating
outside of traditional capital markets, rather than as accelerators serving to supplement capital markets and build the financial
capacity of the organizations they serve.

Key PRI Findings

We draw the following conclusions about PRIs from our research:

PRIs seem to be effectivebut the model is not yet mature and more data is needed to determine impact
PRI use is likely to expand and incorporate greater risk
Not all PRIs are successful: Examples of early PRI failures and current reforms.

PRIs seem to be effectivebut the model is not yet mature and more data is needed to determine impact.

The foundations we reached out to for this project have generally had success with their PRI programs (among
foundations with current programs), where success is defined as high repayment rates, low loss rates, strong inter-
organizational relationships, and mission-aligned impact. However, most foundations do not have a long enough history of
making PRIs to confidently claim success. That is, while existing PRIs are on track for repayment, not enough of them have
reached maturity to track final financial results and social impact.
Several of the representatives with whom we spoke attributed this strong track record of success to the extremely
conservative approach employed by the majority of foundations currently experimenting with PRIs. Foundations are mostly
making safe bets by deploying PRIs to very low-risk organizations--including organizations with whom they do not have a
previous grantee relationship (i.e. organizations that receive limited grant funding and might even be able to access traditional
sources of capital--albeit at very high interest rates). As a result, some experts believe that the PRI model has not fully been
tested. They suggest that foundations need to take on more risk and put money where traditional capital wouldnt go in order
to truly determine the potential value and effectiveness of PRIs.

PRI use is likely to expand and incorporate greater risk.

There is reason to believe that use of PRIs as a mission-driven finance tool will continue to grow. According to a study
conducted by Indiana Universitys Lilly Family School of Philanthropy, the annual number of PRIs made doubled between the
36
mid-90s and mid-2000s, from below 200 to more than 400. As the use of PRIs expands, it will be instructive to see whether
loss rates increase. We predict that if smaller foundations with less internal capacity for PRI administration enter the market,
and if larger foundations begin to take on increasingly risky deals, loss rates will naturally increase. This will not necessarily
represent a loss for the industry, however, as long as financial and social returns also increase and foundations are able to
identify desirable risk-reward profiles and develop sufficiently large and diverse portfolios of PRIs to minimize their risks.
Evidence exists that some foundations are already beginning to take on more risk. One large national foundation, for
example, has created a class of assets called Strategic PRIs. These strategic PRIs comprise higher-risk PRIs for existing
foundation grantees in need of greater capital support. These PRIs are analyzed separately from the foundations existing class
of PRIs for ideal organizations--mostly organizations that would not otherwise receive grants and would be more likely to
qualify for traditional sources of financing. The Strategic PRIs are predicted to have higher loss rates than traditional, ideal
PRIs.

Not all PRIs are successful: Examples of early PRI failures and current reforms.
36
Foundations Not Making Many Program-Related Investments. The NonProfit Times. 21 May 2013. Web.
http://www.thenonprofittimes.com/news-articles/foundations-not-making-many-program-related-investments/

12
May 2014


While most foundations have had positive results with PRI programs, a few notable exceptions exist. A large Midwest-
based foundation re-launched its PRI program three years ago after previous challenges with its PRI portfolio. Prior to the re-
launch, the foundation was forced to restructure or extend a few PRIs that recipients could not repay. When re-launching the
program, the foundation instituted a paradigm shift to reframe PRIs more as investments than as grants. This shift included
expanding efforts to clearly communicate repayment terms to potential recipients, altering the actual structure of loan
repayment terms to include annual interest payments (rather than principal-only payments until maturity), and leveraging a
partnership between the foundations program team and a newly formed Market-Driven Investment team to conduct financial
diligence and administer the loans. Since the re-launch, this foundation has been very successful with its portfolio of current
Program Related Investments (all structured as 10-year loans with 1% interest).
Additional anecdotal evidence indicates that some foundations may have experienced PRI defaults during the recent 2008
Recession. These foundations made PRI loans or guarantees to organizations which had been allocated federal grant dollars,
but that did not receive the funding when the government suspended or scaled back certain programs.
Still, from the perspective of some industry experts, including Robert Lang of L3C Advisors and Luther Ragin Jr. of the F.B.
37
Heron Foundation, PRIs were some of the best performing investments in 2008, because their below-market rates hardly
suffered the substantial drops of the various other assets classes that saw early recessionary rates as low as -20%. Additionally,
38
in a survey conducted by the Foundation Center in 2010 over half of respondents indicated that they intended to employ
more non-grantmaking activities (with nearly 10% expressing interest in PRIs) because of the recession. However, the study
conducted by the Lilly Family School of Philanthropy found that the number of PRIs made by foundations dropped from 125 in
39
2007 to 78 in 2008, climbing to 97 in 2009, and falling again to 64 in 2010.
Patrick Rooney, associate dean for academic affairs and research at the Lilly Family School of Philanthropy explained that,
part of it is collateral damage of the Great Recession. When the stock and bond markets are plummeting in value, I suspect
40
that the investment officers and the boards at foundations became very concerned about the performance of the portfolios.
This contrary picture may speak to the divide between foundations utilizing PRIs for investment or for program
application-- with recessionary pressures curtailing PRI use for endowments, while bolstering interest in use for foundation
programs.

Best Practices and Recommendations for Expanding PRI Use

Our findings lead us to recommend several courses of actions for foundations in Southeastern Michigan seeking to expand the
use of PRIs.

Actively engage boards in PRI education
Segment grant recipients to identify attractive PRI targets
Position foundation for thought leadership
Establish structures to facilitate collaboration among Program and Investment teams

37
PROGRAM-RELATED INVESTMENTS IN PRACTICE. Symposium: Corporate Creativity: The Vermont L3C & Other
Developments in Social Entrepreneurship. Vermont Law Review, Fall, 2010. Transcript. WestlawNext.
38
Grantmakers can do more than make grants. Inside Philanthropy. 15 Feb. 2010. Blog. 11 May 2014.
http://philanthropyjournal.blogspot.com/2010/02/grantmakers-can-do-more-than-make.html
39
Foundations Not Making Many Program-Related Investments. The NonProfit Times. 21 May 2013. Web.
http://www.thenonprofittimes.com/news-articles/foundations-not-making-many-program-related-investments/
39
"Leveraging the Power of Foundations-An Analysis of Program-Related Investing." Leveraging the Power of Foundations-An
Analysis of Program-Related Investing. Mission Throttle, 21 May 2013. Web. 15 Apr. 2014.
40
Program-Related Investments Lost Steam in the Bad Economy. Grant Makers. The Chronicle of Philanthropy. 21 May 2013.
Blog. 11 May 2014. http://philanthropy.com/article/Program-Related-
Investments/139435/?cid=pt&utm_source=pt&utm_medium=en

13
May 2014

Pair foundations with intermediaries
Group foundations into investment syndicates

Actively engage boards in PRI education.

It is critical for members of a foundations Investment and program teams seeking to use PRIs to engage in campaigns
to actively educate their board members about the real benefits and risks of using PRIs. The foundations that have successfully
launched PRI programs have typically benefitted from charismatic, experienced leaders in the program and/or investment
teams who have pursued calculated, strategic opportunities to educate board members about PRIs. For example, an Executive
Director of a small Southeast Michigan-based foundation invited two senior investors from F.B. Heron, a New York-based
national foundation leader in MRIs and PRIs, to lead an education session for his board.
Learning from leaders in the space is an effective approach to leverage credibility when considering a PRI program.
Several representatives of foundations in Southeast Michigan with whom we spoke referenced membership in the Mission
Investors Exchange and other industry groups as critical to their initiation of a PRI program. These groups host regular
conferences and events, publish white papers and other thought leadership materials, and serve as key sources of information
and professional connections.






Segment grant recipients to identify attractive PRI targets.

In order to identify attractive PRI projects, a first step for foundations is to segment their current grant recipients into
groups that can receive and manage PRIs and groups that cannot, and to segment opportunities for charitable giving into
circumstances that are better suited to PRIs and ones that are not. An overview of this segmentation is illustrated below.

Good Opportunity for a PRI (large Bad Opportunity for a PRI (small
When to explore a PRI with a amount of money required, amount of money required,
41
recipient foundation is not the sole investor, foundation is the sole investor,
etc.) short term campaign, etc.)

Recipients equipped to manage

PRIs (CDFIs, intermediaries, large Conduct PRI Do Not Conduct PRI
non-profits with credit histories)

Recipients NOT equipped to Can the foundation help to build

manage PRIs (small non-profits, the capacity of the recipient?
Do Not Conduct PRI
short term organization, no income If yes, Conduct PRI
stream) If no, do not conduct PRI

One large foundation, for example, only considers entities with revenue-making streams for capital investment in the
form of PRIs. Grants are often reserved for research-oriented or product development projects. There is a gray area,
however, with funding start-ups, where a 0% loan may be preferred over a PRI, depending on the risk involved, among other

41
See Personal Conversation with Christine Looney (Apr. 2014).

14
May 2014

variables. The process of deciding when a grant is preferred over a PRI is largely dependent on the exact recipient and requires
a case-by-case approach by PRI managers.
Another large foundation, which has $130 million of outstanding PRI funds composed of 50 PRIs, has a deal-specific
approach where both program and finance teams work together to assess the need of the recipient. As a focus of the Packard
Foundation is land conservation, PRIs at the Packard Foundation are often used as a bridging situation, to assist when a
recipient needs money until federal subsidies or grants for conservation projects are processed. Similarly, PRIs are also
arranged to provide capital for leasing or buying a facility for long-term use.
If a recipient is not equipped to manage a PRI or is hesitant to receive a PRI, a foundation can work to build their
capacity to handle PRIs as well as communicate the benefits of PRIs. By discussing the benefits of PRIs and helping recipients
develop the financial skills needed to process a PRI, foundations can partner with their portfolio of current grantees to explore
PRIs. This approach is better suited to foundations that are already comfortable with the PRI process and can serve as a leader
for their recipients.
In addition to building capacity among a foundations current portfolio of grant recipients, foundations can explore
PRIs by expanding their portfolio to target new recipients who are eager for PRIs. Social enterprises are a growing group of
potential recipients that are well positioned to receive investments and eager to apply for PRIs. In order to accomplish this
expansion of PRIs to the wide array of social enterprises, foundations will have to expand capacity in their deal-sourcing
activities.

Position the foundation for thought leadership.

In the current early stages of PRI development, those foundations that have been most active using the tool have
positioned themselves as thought leaders. These foundations perceive the role of PRIs as capacity-building mechanisms to help
organizations develop financial discipline and achieve sustainability, and thus to build capacity in the social impact sector
broadly over time.
Foundations positioned for thought leadership often perceive their role to be filling gaps within existing capital
markets. By providing influxes of capital in places traditionally lacking such access, they seek to influence capital markets,
paving the way for traditional and non-traditional actors to pursue different types of deals and, in the process, catalyzing
investment in the social impact sector.

As one investment professional at a large Southeast Michigan foundation said of its PRI program:

We dont do deals that banks would straight up do. . .what is exciting about the kinds of deals we have here [is
that]we might be able to use our capital more creatively to prove a concept, so that the organizations we support
can get more traditional sources [of capital] down the line.

An investment professional at another large Southeast Michigan foundation described a PRI to a nonprofit, California-
based CDFI that provides loans to members of underrepresented populations. At 8-12%, these loans have interest rates much
lower than predatory payday loans, and significantly lower than the rates minority candidates would be offered if they applied
for a credit card or bank loan. The Foundation sees a real potential for the success of this low-interest lending CDFI to actually
drive down interest rates among traditional banks and other competitors and alter the loan market--at least in a particular
region of California serving a large underrepresented population.

Seizing emergent trends

While leading foundations work to catalyze investment in underserved segments of the market through the use of
new tools and strategies, they also tap into existing trends. Some foundations cited the growth of microfinance, crowdfunding,
social enterprises, Venture Capital impact investments, and retail individual PRIs as inspiration for their own PRI work. These

15
May 2014

foundations calculate that the market will go the PRI way regardless of their involvement, and they do not want to miss the
proverbial boat.
The organizations that seek recognition as thought leaders allocate staff and public relations resources toward this
work. For example, one foundation has a designated Knowledge and Influence team that regularly presents at major
conferences. This team is currently developing new digital media assets to support a broader, more proactive communications
strategy.

Establish structures to facilitate collaboration among Program and Investment teams.

One of the challenges that many foundations face when initiating a PRI program is operational. Foundations need to
determine where the PRI program will live within the foundation. Should PRIs be managed by program officers with impact
area expertise, or by Investment staff with financial expertise? Will the PRI work require new collaboration among these
traditionally divergent groups within the foundation? It is important to get this balance right in order to avoid unnecessary
competition or hostility among stakeholders.
While there is no silver bullet to the question of how to best position a PRI program within a Foundation, there appear
to be some structures that work better than others. Below is a quick overview of some of these structures and our
observations about their effectiveness.

Model A: A Foundations Program team uses PRIs as one tool in a grant making toolkit. The Investment or Social Investment
team plays an advisory role, but does NOT have its own PRI budget.

Assessment: This model minimizes competition, since Program and Investment team budgets come from different
sources. It seems to be effective, but will likely only be sustainable for Investment teams that have their own
endowment asset bases. Social Investment teams would likely also need their own budgets, and could not sustain
their work solely by playing advisory roles to the Program teams.

Model B: A Foundation creates a new Social Investment team and awards it a PRI budget from within the 5% grant payout.

Assessment: This model can create conflict because it creates a structure within which the Program teams and Social
Investment teams are effectively fighting for the same 5% tax-exempt budget.

Model C: A Foundation creates a new Social Investment team and awards it a PRI budget from within the endowment fund
asset base.

Assessment: This model minimizes conflict among the Social Investment and Program teams. When only small
amounts of the endowment are allocated toward making PRIs, it doesnt seem to challenge board requirements
around fiduciary duty. But how big can the PRI allocation grow before the fiduciary duty to achieve high returns on the
endowment is challenged?

Model D: A Foundation outsources PRI underwriting and diligence to a third party consultant, even though the Foundation
might do much of the initial deal sourcing.

Assessment: This strategy seems to be effective for many small Foundations, but it limits their control over and ability
to scale the PRI program.

Model E: A Foundation has one team that makes all grant making and investment decisions, e.g. a Capital Deployment team.

16
May 2014

Assessment: This is probably the most innovative and radical foundation structural model. Conflict is minimized
because grants, PRIs, MRIs, and traditional investments are all seen as tools at the disposal of a central team
containing both program and investment expertise. This structure might become onerous to manage for large
foundations, however. In order to support the creation of new PRI structures with sufficient human resource capacity,
the most effective foundations take actions to educate program specialists about investments and PRIs--just as they
do their board members--and to hire social impact-oriented investment professionals.

Pair foundations with intermediaries.

Perhaps the simplest and most comprehensive solution to the issues above is the partnership of foundations with
financial intermediaries (e.g. CDFIs), organizations that pool capital from multiple sources and reinvest in organizations that
have both social impact and financial returns. By investing through an intermediary, a foundation gains significant advantages:
access to specialized expertise to improve investment performance, lowered transaction costs through economies of scale,
reduced financial and reputational risk, ability to leverage tax credits and non-philanthropic capital, a broader pipeline for
potential investments, and consolidated financial and social impact reporting. Intermediaries offer greater efficiency of
investment management as well as the ability to combine funding with other foundations and more traditional sources of
42
capital to expand the impact of their investments.
While the number of investment intermediaries set up to support foundations is growing, there is not a
comprehensive directory of intermediaries for foundations to browse. As a result, foundations have to do some research to
find intermediaries that match their PRI needs, or partner with several organizations to create a custom intermediary network
43
to serve their combined demand for social and financial investment services.

Group foundations into investment syndicates.

42
Cooch, Sarah, and Mark Kramer. Aggregating Impact: A Funders Guide to Mission Investment Intermediaries.
43
Id.

17
May 2014

The approach of partnering with like-minded foundations and other organizations also appears to be a growing trend
in the industry. Increasingly, foundations are forming syndicates, not unlike those found in traditional venture capital deals, to
make larger investmentsoften working with intermediaries to structure the investments. These types of deals are most
commonly being arranged to support large-scale community development projects. The New Economy Initiative in Michigan is
44
an example of one such project involving the coordination of more than 10 local foundations to initiate a PRI pool.
Foundations are also partnering in smaller groups of 1 to 3 organizations on deals. These partnerships typically involve
at least one foundation more experienced with PRI funding, and one or two others experimenting with the tool. Through such
alliances, smaller foundations can leverage the experience and underwriting resources of larger foundations to get their feet
wet making PRIs before deciding whether to initiate a formal practice. The large foundations benefit from being able to scale
underwriting costs over larger loan amounts. At least one foundation representative we spoke with identified such
partnerships as important tools for advancing knowledge and capacity within the PRI landscape in a way that is often more
45
effective than approaches to education such as trainings, white papers, and conference presentations.

Trends for the Future

The PRI space has grown tremendously over the past several years, with an increasing number of foundations
engaging in conversations to begin implementing program-related investments and to use endowments to achieve impact
through market-based projects. Foundations that have long been using PRIs are evaluating strategies for the future as the
participants begin to evolve. Specifically, as PRI recipients use more sophisticated strategies to manage funding, foundations
are beginning to examine new and efficient ways to best distribute PRIs. Additionally, as the PRI space has attracted private
investors interested in impact investments, including through pension funds, larger foundations are exploring ways to leverage
this private money to magnify impact in their stated target areas. Examples that were discussed in our interviews include
developing intermediaries or defining credit-enhancement positions. We predict that over the next few years foundations will
increase PRI financial capacity as more diversified players enter the space and more foundations gain comfort making PRIs.


Areas for Future Research

Measuring the social impact of PRIs. Once PRI financial success has been adequately demonstrated over a sufficient
period of time and sample size, the next challenge will be to measure social impact. Will PRIs achieve the intended social
outcomes in the short term and desired social impacts in the long term? Does providing capital in the form of PRIs vs.
grants lead to more catalytic and sustainable social impact, as intended?
Analyzing PRI growth and identifying foundation structural shifts to accommodate PRIs. What level of PRI funding can a
foundation healthily sustain? Will the mix of PRIs remain constant, or will guarantees, equity investments, deposits, and
other financing forms grow in prevalence? How will foundation structures and processes change to support substantially
larger PRI allocations? Will more foundations shift away from making PRIs out of their 5% grant payouts and start using
endowment funds to create new PRI budgets?
Tracking the evolution of the financial intermediary landscape. How will foundations solve the problem of finding solid
intermediaries in underdeveloped geographies? How will the work of CDFIs and other intermediaries evolve over time?
Will more foundations work with intermediaries, or will foundations start to make direct PRIs and stop working through
intermediaries as they grow their own internal capacity?

44
Personal communication, Max & Marjorie M. Fisher Foundation (Mar. 2014).
45
Personal communication, F.B. Herron Foundation (Mar. 2014)

18
May 2014

Tracking the emergence of a PRI retail industry. Will traditional actors (banks, investors) enter the PRI space in significant
numbers? Will they work independently or in syndicates? Will banks continue to go in on deals with foundations? Will PRI
contributions from individuals continue to grow?
Analyzing the influence of new social finance mechanisms. Will the growth of nontraditional financing tools, such as
social impact bonds, New Market Tax Credits, micro-lending, and crowdfunding, affect the use of PRIs? Where will PRIs fit
into this landscape? How will new business incorporation structures (L3C, social enterprises) and investment approaches
(e.g. impact investing) influence the use of PRIs?

A key point among foundations we interviewed was their priority to have PRIs fulfill the foundations programmatic
objectives versus deliver strong financial returns. PRIs act as an investment vehicle designed in many cases to absorb a
foundations financial risk. That is, although the size of a foundations funds allocated for PRIs is often regulated and
constrained, the success of foundations PRI portfolio is measured primarily by success of the programs they support, rather
than the return or profitability of the investments. In fact, a sizeable number of PRIs are structured at 0% interest rates.
This is not to say that financial interests are unimportant. On the contrary, repayment is a minimum requirement of
PRI deals (regulated by the IRS), and the ability to make payments is an important consideration of the due diligence process.
However, a foundations decision to invest is dictated first by its mission and goals. Foundations source funding recipients that
fulfill their objectivesand then proceed accordingly. A PRI that receives a financial return on investment, but falls short of its
programmatic impact, would not be considered a successful outcome by a foundations metric. In contrast, the term double
bottom line investment accurately reflects mission-related investments (MRIs) in that it places both financial return and
program objectives as equally weighted priorities. MRIs are increasingly becoming considered by foundation boards to fill in
where they may be more appropriate than PRIs in fulfilling program-related priorities as a result of the desire to integrate both
financial and programmatic goals.
Programmatic impact and financial return, however, are closely linked. PRIs generally succeed in encouraging financial
discipline for recipients, especially early-stage ventures. This can especially be seen in the track records of large foundations.
For example, in the Packard Foundations 30 years of PRI experience, less than 1% of investments have not realized the
anticipated return. Similarly, only 30% of the Ford Foundations PRIs are classified as high-risk, with a large part of write-offs
occurring at the beginning stage of PRI administration when investment strategies were still being developed--as opposed to
its current break-even balance.

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May 2014

APPENDIX A: Participating Organizations (Interviews)

Ann Arbor Community Foundation
Annie E. Casey Foundation
Ashoka
Bodman PLC
Caplin & Drysdale
F.B. Heron Foundation
Ford Foundation
Invest Detroit Foundation
Jaffe Raitt Heuer & Weiss
Kresge Foundation
MacArthur Foundation
Mark J. Lane Wealth Group
Max M. and Marjorie S. Fisher Foundation
McGregor Fund
Skillman Foundation
William and Flora Hewlett Foundation
W.K. Kellogg Foundation

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May 2014

APPENDIX B: Interview Questions

General Interview Questions

Purpose of Interview: To understand a Foundations perception towards PRIs, its experience working with nonprofits (with and
without PRIs), and the factors affecting its choice to prioritize PRIs in the future.

Background
Can you tell us a little about your current portfolio of grantees?
What types of organizations do you fund? (e.g.non-profits, L3Cs, B-corps, etc.)
How is your funding divided among different issue areas (approximate %s) ?
How many organizations do you have longstanding funding relationships with?
What is your general strategy of selecting and investing in programs?
What is the range of grants you disburse in terms of monetary value?
What types of funding models do you use?
How do you decide on a particular funding model?
What are unique set of benefits and limitations for each of your current types of funding models?

Perception towards PRIs
For organizations who have not used PRIs
Have PRIs entered the conversation over the past few years?
What has been the general attitude toward PRIs?
What factors are behind your current decision to not use PRIs?
What potential challenges do you foresee in setting up/launching PRIs?

For organizations who have been using PRIs
What was the motivating force behind introducing PRIs?
What was the general attitude toward PRIs at inception?

Experiences
Organizations who use PRIs
How would you describe your overall experience using PRIs?

Process
Organizations who use PRIs
Can you describe the process of using a PRI, from the decision to make the loan/investment to realizing a
return?
How does the process of managing a PRI compare to managing a traditional grant?

Efficacy and Benefits
Organizations who use PRIs
How would you describe the overall effectiveness of PRIs in terms of realizing financial returns?
How would you describe the overall effectiveness of PRIs in terms of realizing program impact objectives?
Is there any tension between achieving social impact and realizing financial returns?
Which organizations have you had the most success using PRIs with?
Can you identify any common characteristics of those organizations?
Do you tend to administer PRIs to the same organizations year over year?

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May 2014

What is your PRI retention rate?
Are there examples of organizations to whom youve administered both PRIs and other types of funding?
Have you seen any differences in the quality and effectiveness of programs of both funding types?
Which types of programs are best suited for PRI funding, in your opinion?

Challenges
Organizations who use PRIs
What have been some challenges to using PRIs?
Have you had any internal challenges?
Have you had any externals challenges--either with recipient organizations or other entities?
Were any of these challenges anticipated? Were any totally unexpected?

Political Considerations
Have you experienced any political challenges with using PRIs, either internally within your
organization, or externally?

Legal Issues
What legal considerations are relevant to making PRIs?
Have you had any legal challenges making PRIs?

Looking to the Future
To what extent are PRIs currently being considered for future implementation?
What effect do you think an increase in PRIs can potentially have on the Foundations ability to expand its
work?
Would you recommend PRIs to peers at other Foundations?
What factors should grantmakers consider when deciding whether or not to implement PRIs?

22
May 2014

APPENDIX C: IRS Examples of PRIs

Example 9. X is a socially and economically disadvantaged individual. Y, a private foundation, makes an interest-free loan to X
for the primary purpose of enabling X to attend college. The loan has no significant purpose involving the production of income
or the appreciation of property. The loan significantly furthers the accomplishment of Y's exempt activities and would not have
been made but for such relationship between the loan and Y's exempt activities. Accordingly, the loan is a program-related
46
investment.

Example 12. Q, a developing country, produces a substantial amount of recyclable solid waste materials that are currently
disposed of in landfills and by incineration, contributing significantly to environmental deterioration in Q. X is a new business
enterprise located in Q. Xs only activity will be collecting recyclable solid waste materials in Q and delivering those materials to
recycling centers that are inaccessible to a majority of the population. If successful, the recycling collection business would
prevent pollution in Q caused by the usual disposition of solid waste materials. X has obtained funding from only a few
commercial investors who are concerned about the environmental impact of solid waste disposal. Although X made substantial
efforts to procure additional funding, X has not been able to obtain sufficient funding because the expected rate of return is
significantly less than the acceptable rate of return on an investment of this type. Because X has been unable to attract
additional investors on the same terms as the initial investors, Y, a private foundation, enters into an investment agreement
with X to purchase shares of Xs common stock on the same terms as Xs initial investors. Although there is a high risk
associated with the investment in X, there is also the potential for a high rate of return if X is successful in the recycling
business in Q. Ys primary purpose in making the investment is to combat environmental deterioration. No significant purpose
of the investment involves the production of income or the appreciation of property. The investment significantly furthers the
accomplishment of Ys exempt activities and would not have been made but for such relationship between the investment and
47
Ys exempt activities. Accordingly, the purchase of the common stock is a program-related investment.

Example 15. A natural disaster occurs in W, a developing country, causing significant damage to Ws infrastructure. Y, a private
foundation, makes loans bearing interest below the market rate for commercial loans of comparable risk to H and K, poor
individuals who live in W, to enable each of them to start a small business. H will open a roadside fruit stand. K will start a
weaving business. Conventional sources of funds were unwilling or unable to provide loans to H or K on terms they consider
economically feasible. Ys primary purpose in making the loans is to provide relief to the poor and distressed. No significant
purpose of the loans involves the production of income or the appreciation of property. The loans significantly further the
accomplishment of Ys exempt activities and would not have been made but for such relationship between the loans and Ys
48
exempt activities. Accordingly, the loans to H and K are program-related investments.

46
Id.
47
Examples of Program-Related Investments, 77 Fed. Reg. 23,431 (Apr. 19, 2012) (to be codified at 26 C.F.R. pt. 53).
48
Id.

23
May 2014

APPENDIX D: PRI Independent Study Proposal

Research Project and Independent Study Opportunity:
State of PRIs - Moving PRIs Forward

Goal: Analyze the current program-related investment (PRI) landscape with a particular focus on forecasting next steps and
growth in the field, to help practitioners capitalize on PRI opportunities.

Educational Benefits: This study will provide students an opportunity to explore the PRI field in-depth alongside practioners. In
particular, students will be able to link lessons from Michigan classes to current discussions in the field of impact investing, and
consequently help drive this space forward to more effectively support social innovation.

Structure: Conduct the study using the Delphi strategy - an iterative approach intended to engage key stakeholders to help
forecast upcoming trends in the PRI space. The team will work with 12-15 stakeholders, including foundations, impact
investors, regulators, policymakers, and organizations accepting PRIs. An initial survey will be sent-out to the organizations.
The team will then analyze these results. Following analysis #1, this process will be repeated two more times, potentially
including face-to-face meetings. A robust analysis and report will follow the third survey.

Key Questions to Answer:
What are major issues in the PRI world?
How can PRIs be a more substantial component in the social finance and impact investing space?
What are the barriers to broader acceptance and use of PRIs?
What are the stakeholders priorities for the year in terms of PRIs?

Useful Experience and Skills Across the Group: Strategy, finance, law, public policy, economics, formal survey experience

Green Garage Liaison: Robert Weins, Insight Partners LLC

Additional Support: Dan Smale, Spearhead Capital LLC; Warren Watkins, Director, Leelanau Conservancy; Chris Dine, Bodman
PLC

Anticipated Hours/Week: 8-10

Why the Green Garage and Social Venture Fund? The Green Garage is an innovative business enterprise, co-working space,
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and community of people driven to support Detroits sustainable future. The UM Social Venture Fund (SVF) is the first
student-run impact investment fund in the country. Through investment activity, due diligence, capacity building and research
projects, SVF provides thought leadership on impact investing issues. This partnership between the Green Garage and SVF
presents a unique opportunity to produce meaningful research to support PRI practitioners and move forward the impact
investment community.

For additional information, please contact Perry Teicher, Lead, Urban Revitalization, UM Social Venture Fund.
pteicher@umich.edu, 248.736.6126.

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Green Garage Detroit, http://greengaragedetroit.com/index.php?title=Main_Page (last visited Dec. 3, 2013).

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