The Mission-Driven Venture: Business Solutions to the World s Most Vexing Social Problems

Chapter 4PRIs and L3Cs

In exchange for the tax benefits they enjoy, private foundations are required by U.S. law to distribute 5 percent or more of their assets for charitable purposes every year. This obligation has historically been met primarily by making grants to charities that are too often in feverish competition with one another to win them. But, increasingly, foundations are discovering another, arguably better way to meet their distribution requirements—“program-related investments,” or PRIs, that support charitable projects or activities that further foundations' own missions.

PRIs can take the form of loans, loan guarantees, lines of credit, linked deposits, or other investments—even including equity investments in for-profit businesses. (Since nonprofits have no owners, they have no equity to sell.) Therein lies an accounting advantage the plain-old grant could never match. Whereas a grant is an expense, once paid never to be recouped, a PRI is an asset carried on the foundation's balance sheet until it is recovered one day, together with interest or gain, and then redeployed as a charitable grant, program-related investment, or a combination of the two. Unlike a grant, which is calculated to do some good, but only once, the PRI offers foundation managers, stewards of the resources entrusted to them, a financial multiplier benefit and, with it, a seemingly irresistible social multiplier benefit.

A program-related investment is one that meets three definitional tests: ...