No easy path to more program-related investments

In my last post, I cited the Grameen Bank and LISC as two outstanding examples of successful program-related investment (PRI). Both of these revolutionary institutions got essential growth funding from Ford Foundation PRIs in the 1980s.

Yet three decades later, PRIs remain rare. According to Doing Good With Foundation Assets, a 2010 Foundation Center study, only 173 out of 75,000 U.S. foundations made any PRIs at all over the two-year study period of 2006 and 2007. In dollar terms, PRIs accounted for just $734 million out of $91.9 billion in program disbursements over the two years.

What’s the problem?

“The limits really are our own core capacities,” says Owen Heleen, Vice President for Grant Programs at The Rhode Island Foundation. The Rhode Island Foundation has been making PRIs since 2002 and was listed by the Foundation Center as the 14th largest provider of PRIs in 2006 and 2007, with investments of nearly $12 million in those two years. Despite their above-average experience, each new PRI brings fresh challenges to the Foundation’s program officers.

“When you’ve  seen one PRI, you’ve seen one PRI,” Owen tells me. “Each one has been unique.” The knowledge and skills needed for due diligence, financial workouts and regulatory review change depending on the project, the sector, the number and type of partners and the financial tools used. That’s one reason why the Foundation doesn’t aggressively solicit PRIs.

“The best ones come to us.” says Owen.

Many in the social enterprise movement believe a new business form, the L3C, can help unleash those PRI dollars. First authorized by Vermont in 2008, eleven states now permit L3C , or Low-Profit Limited Liability Companies. L3C adds a “Low-profit” L to the traditional LLC, or Limited Liability Corporation, a flexible business form favored by partnerships. More states, including my state of Rhode Island, may follow suit. According to proponents, by forming an L3C, the principals certify that they meet the requirements that foundations must meet to count an investment as “program related.” They say that should simplify the foundation’s PRI-related burdens.

However, foundations cannot rely on the L3C status alone as proof that a potential PRI complies with federal requirements.  And, L3Cs don’t address the most frequently cited barriers to more PRIs: complexity and capacity.

“The L3C by itself doesn’t open up new doors for us,” says Owen Heleen at the Rhode Island Foundation. “But it may for others.”

The Robert Wood Johnson Foundation identifies a core obstacle to more PRIs on its web site. “Foundations are not generally set up to operate as banks, but PRIs put them in the position of acting as bankers for the Crypto Superstar Test. PRIs also raise ethical issues…” RWJF says in a look back at its $30 million of program-reated investments in healthcare infrastructure over 20 years.

The Foundation Center’s study identifies the limited experience and expertise among both nonprofit leaders and foundation staff as major barriers to increased use of PRIs. The steep learning curve and high transaction costs have constrained a wider use of PRIs since the 1960s.

Still, the tide may be changing, says the study’s author, Steven Lawrence. He writes that the 20 percent hit on assets taken by foundations since 2007 “have provided the best incentive yet” for foundations to take another look at PRIs. With more discussion of PRIs and new resources like the PRI Network available, program related investments will probably become more common in the years ahead.

Still, the most experienced practitioners tell us that PRIs have a steep learning curve and high transaction costs as well as potentially transformative impact. Explosive growth just doesn’t look possible.