Few funders make loans, equity investments

Despite their growing use of program-related investments, a tiny share of foundations are using that strategy to expand beyond their traditional grantmaking to support nonprofits, a new study says.

Total investment by foundations in program-related investments such as low-interest loans and equity investments grew to $701 million in 2009 from $139 million in 1990, while the average size of those investments grew steadily to more than $1.5 million in 2009 from just over $660,000 in 2000, says the study by the Indiana University Lilly Family School of Philanthropy, which cited IRS data.

Yet over the past 20 years, only about 1 percent of U.S. foundations each year made program-related investments, or PRIs, the report, Leveraging the Power of Foundations, which was sponsored by Mission Throttle.

The number of foundations making PRIs peaked in 2004 at 137, according to Foundation Center data, then fell to 97 in 2007, while the number of PRIs made each year fell to 244 in 2009 from 421 in 2004, the study says.

Over half the PRIs the study tracks were loans, but foundations also increased their use of equity investments and debt other than loans, such as loan guarantees or loan funds, the study says.

Housing, community development and education were the program areas that received both the most dollars and highest number of PRIs that foundations made between 2000 and 2010, the study says.

Also likely to receive PRIs during the period were non-traditional program areas such as the environment, health, and arts and culture, it says.

Obstacles that continue to limit the use of PRIs, according to interviews with foundation leaders, include lack of information or knowledge about PRIs; lack of expertise in managing PRIs; potential transaction costs related to PRIs;p and lack of appropriate opportunities.

Measuring success with PRIs also is challenging, the study says.

Foundations generally define success as programmatic or social success, and as financial or investment success, the study says, and some consider a PRI successful even it it did not produce a positive financial return on investment but did produce the desired social outcome.

Achieving success, the study says, requires planning, new team structures, traditional financial investment skills, and social metrics.

Some foundations say dialogue among foundations and supporting professional networks have helped boost expansion of the number of PRI users.

Effective impact investment strategies and implementation plans should call on investment, financial and program professionals at foundations to work together, the report says.

‘There is growing perception in the foundation community that foundation resources are scarce relative to society’s needs and that PRIs could offer new strategies to aid in meeting these needs,” Una Osili, director of research at the School of Philanthropy, says in a statement.

“Currently, PRIs are an important tool used by a small segment of the grantmaking community,” she says. “More education and information sharing among grantmakers will be needed if PRIs are to gain more widespread use and achieve their full potential.”

Todd Cohen

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