How PRIs Can Help Maximize Impact and Approaches for Getting Started

In 2018, Mary Ann Weiss wrote a post for NCFP about program-related investments (PRIs), their advantages, and the barriers to using them. Since then, the philanthropic landscape has shifted and Mary Ann has built her own experience with PRIs. Learn more about use cases for PRIs and how to get started using the tool to amplify your impact.

In the five years since writing this post, our world continues to face mounting, intractable problems that demand bigger bets and creative solutions at scale. Program-related investments (PRIs) and impact investments can help foundations leverage dollars to take more risks, innovate and meet evolving challenges beyond traditional constructs. While a great deal has been written about the potential impacts of PRIs—my former post included—given the complexity involved with deploying PRIs, it can be unclear when they may be worth the effort. There are ways to tell when PRIs may be worth the effort as well as some approaches and resources for getting started.

Why are PRIs so complex?

PRIs are like grants in many ways though they require much more complex financial and legal analysis because you are evaluating not only an organization’s potential for impact, but its capacity for repayment. In addition, executing the terms of a PRI is a much more involved process than a grant, involving legal and compliance review, underwriting, and financial monitoring, and accounting. In my experience with PRIs, the process to evaluate and structure a PRI requires significant program staff time, dedicated legal resources, and grant administration to manage the due diligence, execution, and ongoing monitoring. Many foundations either don’t have the in-house staffing and expertise or are uncomfortable with the potential legal and financial risks. Given the complexity, are PRIs worth the effort?

Use cases for PRIs

While it’s clear PRIs are complex, it’s not always clear when PRIs might be the right, or better, tool for achieving impact. While each opportunity should be evaluated individually, below are some use cases for when PRIs might be the appropriate tool over, or in addition to, a grant.

1. PRIs can be a great tool for de-risking capital for other investors by taking a first loss position or providing a guarantee. In this way, PRIs can help build new markets by demonstrating what’s possible because of the financial structure being in the market and influencing the behavior of less risk tolerant actors. One example could be making a PRI to a biotech firm to develop new vaccines for infectious diseases that disproportionately affect individuals living in developing countries. Biotech firms face pressure to focus on commercially attractive markets so a PRI could provide the stimulus funding to attract additional investors and create new markets.
2. PRIs with incentive structures can help motivate companies and organizations shift business practices fundamentally. An example could be making a PRI to an agricultural business with loan forgiveness tied to impact metrics that result in wholesale changes to its supply chain and operating model. This kind of PRI could be a great complement to a grantmaking strategy that supports non-profits promoting sustainable farming education and investing in businesses doing the work.
3. PRIs can help emerging organizations test and build sustainable business models. Say the prior example is a new start-up rather than an established business. Risk tolerant, patient PRIs can help the emerging organization pilot and develop its business model in ways not as easily tested with a grant.
4. A PRI may also enable a foundation to negotiate rights that are typical for an investor but atypical in the context of a grant. For example, a right to appoint board members or have board observer status.
5. Finally, PRIs can generate higher financial and social returns over a traditional grant. Say a foundation wants to help an organization move into a larger physical space. They may consider covering the organization’s rent through a small, multi-year grant or making a much larger, longer-term PRI that would provide the up-front capital to help the organization purchase its own building. Depending on the terms, the foundation may find the PRI is the better bet as it would recycle the funds for future impact and would provide the organization with equity in its own building.

Approaches for getting started

A foundation may determine a PRI is the appropriate tool, but it can be daunting to get started. Below are some approaches for reducing the complexity and risk involved with PRIs:

1. Work through an intermediary: Direct lending can be risky without appropriate staff members with lending backgrounds. Working through experienced intermediaries—including community foundations, donor-advised funds, community development financial institutions (CDFIs) and loan/venture funds—can be a great option to outsource expertise, capacity, and risk. One approach is to make a direct grant to the intermediary who then deploys the PRI. The funds would be recycled at the intermediary for a foundation’s future use. When working through intermediaries, foundations should do their due diligence to ensure the intermediary’s objectives are aligned with the foundation’s and that they have the expertise, relationships, and track record of lending with a clear model for repayment.
2. Collaborate with other funders: Another great option is working with other interested funders to diligence an opportunity jointly and reduce costs on the front end. In this approach, foundations should still involve their individual legal teams in the diligence process.
3. Hire an outside consultant: If resources allow, hiring an external consultant with expertise in PRIs can be a great way to get customized support from where to get started and understanding how PRIs complement a foundation’s existing portfolio and goals, to more robust sourcing, diligence, and underwriting support. Contact NCFP for consultant recommendations.
4. Connect with peers: Finally, consult with other funders—especially ones with similar asset and staff sizes—to learn from their experiences. When I first worked on a PRI, I reached out to a peer funder who shared valuable perspectives that provided a strong starting point for our team. This advice seems simple, but don’t underestimate the power of connecting and learning from your peers.

Conclusion

PRIs offer one tool, among many others, that the philanthropic sector can leverage to push the boundaries of what’s possible to maximize impact. Learn more about impact strategies and tools here.

The views and opinions expressed in individual blog posts are those of the author(s) and do not necessarily reflect the official policy or position of the National Center for Family Philanthropy.