Published by MicroCredit Enterprises, 81 pages. Available at www.mcenterprises.org/pdf/toolkit.pdf
Jonathan C. Lewis, the Chief Executive Officer of MicroCredit Enterprises, a microfinance intermediary, and Robert A. Wexler, attorney at the law firm Silk, Adler & Colvin have crafted this paper to provide technical and legal assistance to private foundations and family offices considering making a Program Related Investment (PRI) in microfinance. The paper goes beyond theory: it is a practical how-to guide. A Program Related Investment (PRI) is the legal term for a debt or equity investment made by a private foundation to a non-profit or for-profit organisation with the chief purpose of advancing a social mission. A PRI involves the potential return of capital within an established time frame in contrast to a grant, commonly a non-returnable donation. This allows the money to be re-cycled for subsequent investments.
The recipients’ benefit not only from the value of the investment itself, but also because the PRI can leverage other capital from conventional sources, allowing recipients to foster long-term sustainability and improving cash flow. PRIs can also be tailored in size and scope during periods of rapid growth, providing the potential for capacity-building that so many mission-driven organisations, especially charities, find hard to achieve.But to provide these benefits, PRIs use financial tools commonly associated with banks or other private investors, such as loans, loan guarantees and equity investments. These potentially complex financial transactions and their concomitant legal and administrative issues mean that foundations use PRIs much less frequently than grants, despite their recognised positive impact. The toolkit is designed to overcome the technical and legal knowledge gap and uncertainty that foundations face when considering a PRI, in particular a microfinance PRI. The primer goes through a series of sections written either by Mr. Lewis on microfinance or by Mr. Wexler on legal issues, explaining in layman’s language the details that a foundation entering a PRI would need to consider.Many of the sections use a Q&A format, with MicroCredit Enterprises acting as an example in each answer. This allows the document to also act as an effective marketing tool for MicroCredit Enterprises, as the format provides explanations of the benefits of its two PRI vehicles in great detail. However, MicroCredit Enterprises makes no copyright claim to any of the contents of the primer, even the appendices containing the draft legal agreements that could easily be adapted for other firms to use, so there is more than just marketing material.The first section explains how PRIs and microfinance work, together and separately. Mr. Lewis explains the role of different players such as Microfinance Institutions (MFIs), Microfinance Networks and a Microfinance Intermediaries, (otherwise known as Vehicles or Funds) and what they can offer the private foundation. He then explains what PRIs are available for those wishing to invest in microfinance and their different features and benefits.
The three main options are:
• Secured or unsecured debt investment
This is a loan made directly to a MFI, or to portfolio of MFIs via a microfinance intermediary.
• Loan guarantee commitment
This a pledge of collateral assets which can secure a line of credit from a third-party lender which, in turn, is used to make a loan to a MFI or to a diversified portfolio of MFIs via an intermediary
• Equity investment
This is an ownership stake in a MFI, or a microfinance intermediary The next section, written by Mr. Wexler, describes the legal framework and requirements for PRIs, with specific reference to the demands of the US Internal Revenue Code (IRC). PRI investments are exempt from the ‘jeopardizing investment rule’ that governs private foundations, which normally prevents them from making investments that could threaten the charity’s overall assets. But the PRI has to meet various other requirements, for example, mission-compatibility with the foundation.
Through Q&As the authors show novice foundations how they can check the suitability of their own institution and the recipient PRI. These Q&A sections cover legal and tax questions, mission compatibility, financial due diligence criteria and a guide to assessing how much administrative workload might be created by the PRI.
Finally, to make the toolkit complete, the authors have included two draft legal agreements as appendices, one covering loans and one covering philanthropic guarantees, that can be downloaded and used by foundations.
Overall it is a very reassuring and professional guide for foundations considering making a microfinance PRI, especially those who do not have in-house or pro bono legal and financial teams, or those who are working with such teams for the first time.
However, the paper neglects to fully consider how mission based investment strategies can underpin the whole structure of a foundation. PRI needs to be contextualized within the realm of Mission Related Investment (MRI), whereby a foundation’s entire assets base (its principle or “corpus”) is eligible to support its mission, not just the small percentage designated for grant-making. US law mandates that a foundation grant a minimum of 5% of its total asset value annually, and it is this fraction from which foundations can make PRIs. By considering MRIs foundation make a much larger asset base, potentially the entirety, available to support its mission. In this way, MRI can boost the investment value by as much as 20 times in comparison to grants and one-off specific PRIs.
Importantly, a MRI strategy requires further legal and administrative chores which further complicate the foundation’s activities, and, for this reason, the author may have chose to exclude a discussion of MRI from this paper as it is already a lengthy practical guide. Nonetheless, mention of MRI is important to educate the foundation community about the options before them in supporting microfinance and other socially beneficial activities that provide a return on capital. Historically, foundations have not contemplated aligning their investment strategy with their grant-making strategy and MRI provides this opportunity.
Amy Rennison, MicroCapital writer
Additional Sources:
The Investors’ Circle, “Mission-Related Investing: Strategies for Philanthropic Institutions”
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