Program-Related Investments and Microfinance, Part 2

Is ‘philanthropic investment’ just a contradictory term to make charity sound business-like? In the US, Program-Related Investments (PRIs) have served as a way for foundations to earn a return on their grant-making dollars since 1969. Such investments made by foundations to support charitable activities offer the potential return of capital within an established time frame, and are well codified in US law. PRIs are the perfect way for foundations to capitalistically and responsibly support microfinance.Of the 66,000+ grant-making foundations in the United States, only a few hundred make PRIs. Giving by the nation’s grant-making foundations increased by 7% in 2004, to $32 billion (pg. 1), but PRI financing makes up a negligible proportion. Why such dismal numbers?

The answer turns out to be the cultural inertia within foundations and non-profits. A return on capital requires a different sort of rigor than social work. And this is just the tip of the iceberg. In 2004, US foundations granted $32 billion, but they held $476 billion in assets. Imagine 1% of this principle corpus invested in microfinance, this would open the door for commercial capital investment. Whereas most huge chunks of capital (pension funds, insurance companies, mutual funds, hedge funds) fall under the ‘prudent man’ US law that obliges the prioritization of profits, foundations (and universities) enjoy leeway under the prudent man rule to invest per their missions.

The irony of course is that microfinance may well out-perform the market, so ‘prudent man’ would be irrelevant. But, we are not an asset class yet, so to get there, we look for leadership not just in your grant-making, Mr. Omidyar, but in your asset management. PRIs are an opening for you to introduce Wall Street to our emerging asset class.

Again, to give Mr. Omidyar and his group the benefit of the doubt, maybe his asset managers and his grant-makers do eat lunch together regularly, maybe they are just “ramping up,” and will fulfill his righteous vision one day soon.

Additional Resources

1) The Foundation Center: Foundation Growth and Giving Estimates: 2004 Preview
2) Although dated, the best document discussing PRI trends is still the Foundation Center’s PRI Financing: Trends and Statistics 2000-2001
3) MicroCapital Blog: Mr. Omidyar’s Philanthropic Vision: a Work in Progress, Part 1