And the New York Times writes about PRIs.
To Advance Their Cause, Foundations Buy Stocks
By STEPHANIE STROM
Earlier this year, the Bill & Melinda Gates Foundation invested $10 million to acquire a stake in Liquidia Technologies, a biotechnology company working on new ways to deliver vaccines.
The foundation bought its shares using a program-related investment, or an investment that can be counted toward federal requirements that it pay out 5 percent of its assets each year.
A growing number of foundations are using such investments, known as P.R.I.’s, to connect with profit-making ventures that advance their missions. But as they become more popular, some officials in the nonprofit field worry that this and other newer mechanisms are blurring the lines between profit-making businesses and charitable work.
“Equity investments, and sometimes debt instruments, are ways to tap into the private sector when we think it will add to the work we are doing and leverage private flows of capital to advance our work in global health, global development and U.S. education,” said Jeff Raikes, chief executive of the Gates Foundation.
The Liquidia investment was made from a $400 million program-related pool the foundation created in 2009. Now, the foundation is increasing that pool to $1 billion, a quarter of which will be used to make equity investments or to finance debt instruments in profit-making ventures.
Its investment in Liquidia piggybacks on capital supplied to the company by traditional investors and is meant to ensure that the technologies the company develops for better delivery of vaccines not only benefit what Mr. Raikes calls “the rich world” but also serve the poor, who are the foundation’s target.
I’m not going to say we couldn’t do this through a nonprofit, but it would certainly be more difficult,” Mr. Raikes said.
Investments like the Gates Foundation’s stake in Liquidia compose but a tiny portion of all program-related investments. About 5 percent, or $37.2 million, of all P.R.I.’s made in 2006 and 2007 was used to buy shares, according to research by the Foundation Center.
The rest of the Gates Foundation’s $1 billion pool, for instance, will go toward more traditional types of program-related investments, like the one it made to guarantee a bond offering by KIPP, a nonprofit manager of charter schools.
But interest is growing rapidly in using P.R.I.’s to buy stakes in businesses that can help foundations achieve their missions, experts say, and the Gates Foundation alone will change the dynamics.
The foundation also put money into two funds that invest in Africa — $7 million in one targeting health-related businesses and $10 million in another aimed at small businesses — and used a $2 million P.R.I. to buy a stake in Inigral. That represents almost the total of all such investments made in the period covered by theFoundation Center report.
Added to about $20 million that the Omidyar Network, the philanthropic investment fund set up by the eBay founder Pierre Omidyar, has put into equity funds and other investments, the amount already exceeds that for program-related investments in the Foundation Center’s last report.
“We made our first equity P.R.I. a little more than four years ago, and after that I got maybe one call a month asking how we did it,” said Will Fitzpatrick, general counsel of the Omidyar Network. “For about the last year and a half, though, those calls are coming in at a rate of one or so a week from a combination of large and smaller foundations thinking about making similar investments.”
Diana Aviv, chief executive of the Independent Sector, the nation’s largest nonprofit trade association, said such investments reflected a broader trend.
“Foundations are increasingly agnostic about how they achieve their goals,” Ms. Aviv said. “If their purpose is, say, to eliminate food deserts, they may see supporting a grocery store chain as the best way of doing that rather than funding a nonprofit program.”
That trend concerns her at a time when government financing for nonprofits is declining and the charitable deduction is under fire. “It’s part of this slow erosion of nonprofit funding streams that threatens to undermine organizations that have been built over decades to meet high standards of public trust,” Ms. Aviv said.
For example, Gerard Cafesjian, who made more than a billion dollars through the sale of a publishing empire, formed a family foundation that has invested and made loans to a variety of companies in Armenia, from a financial services business to extensive media holdings and real estate. Its Web site says it has a total of $128 million invested in that country.
The foundation’s 2009 tax form, the latest available, showed that it used P.R.I.’s to make some $53 million in investments that year, about $42 million of which were equity investments. In contrast, it made just $178,000 in grants.
GLC Enterprises, which manages the foundation, did not respond to a list of questions about its investments.
In most cases, program-related investments pale in comparison to grants. Some foundations, like the David & Lucile Packard Foundation, do not even count them toward the payout requirement.
It first used a program-related investment in 2009, when it put $1 million into Ecotrust Forest Management, a fund set up by Ecotrust, an Oregon-based nonprofit conservation organization.
The fund, whose limited partners include Packard and a handful of family offices and individual investors, acquires forest land in the western United States and Canada and earns revenue using ecologically sound management of those properties.
Mary Anne Rodgers, Packard’s general counsel, said the foundation was working on a second deal and planned to cautiously increase its investments in businesses.
“The principal purpose of these types of investments isn’t the appreciation of capital, though we hope to get a return,” Ms. Rodgers said. “Our main reason for investing in Ecotrust Forest in this way is to demonstrate that sustainable forest practices can generate a profit so that mainstream investors will become more interested in it.”
The Omidyar Network used that strategy to demonstrate the commercial viability of microfinance. It used a program-related investment to become a limited partner in the Unitus Equity Fund, a private equity business affiliated with the nonprofit Unitus. After Omidyar made its investment, the fund attracted a group of limited partners that reads like a who’s who of the venture capital world.
“They were having a hard time raising commercial capital until we did that,” Mr. Fitzpatrick said.
Revolution Foods also needed nonprofit financing to attract commercial capital. Its first financing in 2005 came from what is now known as DBL Investors, a private equity firm, the first fund of which included program-related investments from several foundations.
Revolution Foods has grown to 750 employees making nutritious meals served in more than 600 schools in 20 cities across the country.
“That capital got us off the ground,” said Kristin Groos Richmond, one of its founders. “It helped us hire our first employees and buy our first truck and kitchen equipment.”
Not all program-related equity investments turn into gold, however. From 1999 to 2002, the John D. and Catherine T. MacArthur Foundation used P.R.I.’s to make six investments totaling $6 million to help small businesses in places like Appalachia and the Mississippi Delta.
“To be honest, we’ve seen a mixed set of financial results,” said Debra Schwartz, director of MacArthur’s program-related investments. “So far, a couple have been total wipeouts, there are a couple where we’ll at least get our principal back and maybe two of them will produce a positive return — though I’m not expecting anything gigantic.”
Still, she said, “what we were trying to do was help create jobs, and from a rough accounting, more than 11,000 jobs have been created and maintained. That’s impact.”
Original article here.
