The Foundation has allocated $300 million to making impact investments that advance core programmatic priorities. Under our strategy, these investments could take the form of program-related and mission-related investments and are made with a deliberate intention to generate economic, social or environmental benefits for a particular population, community or society at large.
Program-related investments (PRIs) are a statutorily defined exception in the Internal Revenue Code to the rules prohibiting private foundations from making “jeopardizing investments.” PRIs can take many forms, including loans, equity investments, bank deposits and guarantees. PRIs must be made for the primary purpose of accomplishing a charitable purpose and not primarily for financial gain. One of the tests used is whether an “investor solely interested in making a profit would be unwilling to provide capital on similar terms.” In practice, this means that the PRI will have an interest rate or financial return objective that is lower than prevailing market rates for loans and investments of similar duration, credit quality and risk.
Mission-related investments (MRIs) are those that are made with a clear intention to meaningfully contribute to the accomplishment of the Foundation’s philanthropic mission and the success of our programmatic strategies, and to achieve a financial return commensurate with the risk and the social impact to be achieved. Unlike PRIs, MRIs are not statutorily prescribed and have no consensus definition. The jeopardizing investment rules and other legal requirements, such as state prudent investor rules, do apply to MRIs.
Impact investments are tools that foundations and others can use to support charitable purposes, provide public benefits and advance social change by addressing specific capital gaps. Impact investors unlock new, more, and more useful or suitable forms of capital for targeted populations, regions, sectors or markets. They do this in two ways:
- Providing unconventional financing and guarantees that are unusually low cost, patient, risk-tolerant or creatively structured.
- Providing extraordinary help and benefits, including: access to specialized expertise, relationships and networks; greater visibility and credibility; active engagement, advice and assistance.
Organizational level benefits:
Carefully underwritten and vigorously monitored impact investments offer two important benefits to their recipients that are hard to obtain from grants alone:
- Providing a meaningful test-bed for innovation and development – giving new projects, businesses, social ventures, or entire sectors and markets, the opportunity to demonstrate creditworthiness and value by successfully repaying loans and generating positive financial returns.
- Holding impact investment recipients accountable for financial and business discipline in ways that help them become more successful and economically viable over the long-term.
Ecosystem level benefits:
From a broader, “ecosystem” perspective, successful impact investments can catalyze new financing vehicles, innovative business practices and models, and improved public policies (including tax incentives, subsidies and regulations). These changes, in turn, can make it possible to tackle capital gaps at a meaningful scale. To realize this kind of systemic change, impact investments are used to:
- Bridge recurring timing and cash flow problems;
- Mitigate or absorb risks that deter conventional investors;
- Build the overall scale, efficiency and effectiveness of enterprises (both nonprofit and for-profit), sectors or markets;
- Increase the expertise and credibility of entrepreneurs and nonprofit organizations, better enabling them to inform and shape both policy and practice;
- Generate a record of experience and data for other investors; and
- Develop or expand specialized financial intermediaries, secondary markets and other vehicles that reduce investors’ transaction costs and risk, set standardized investment criteria and processes, pool similar investments, and provide liquidity.
Since 1986 the MacArthur Foundation has used program-related investments (PRIs) to expand the reach of its grantmaking, providing approximately $450 million to more than 200 recipients in the U.S. and around the world. During the early years of this program, PRIs were made in conjunction with many different Foundation programs, including conservation, education, affordable housing, women’s health, and independent media to support nonprofits and for-profit businesses in related fields. Many early PRIs went to Community Development Financial Institutions (CDFIs) that expand economic opportunity among low-income people and communities by providing affordable financial products and services. Our Impact Investing loans have helped these institutions attract hundreds of millions of dollars in additional capital from banks, pension funds, and social investors. Following a comprehensive evaluation of the PRI program in 2000, we decided to increase our use of PRIs and to limit their use to a few areas of major grantmaking interest.
The Foundation has recently begun exploring mission-related investments for investment opportunities aligned with the Foundation’s domestic and international programs.
Our Strategic Approach
The Foundation’s impact investing work takes a “problem first- tool second” approach, where program priorities, leverage and impact guide the identification, deployment and management of impact investments. From this vantage point, impact investments are used to enhance the outputs and outcomes of the Foundation’s grant-making strategies by providing leverage, connections, learning, influence and demonstrations that would not otherwise be possible.
Over the past decade, we have used PRIs to pursue three programmatic objectives: to help grow the capacity of existing well-managed CDFIs to serve the field; to preserve affordable rental housing in Chicago and nationally through the Window of Opportunity Initiative; and to advance community and economic development in Chicago, including the transformation of public housing and foreclosure prevention and mitigation.
As part of our ongoing commitment to strengthening affordable rental housing in the US, the Foundation expects to make impact investments totaling up to $25 million to implement multiple innovative models for financing energy efficiency improvements. In addition, we will continue to provide capital to advance the Foundation’s work in Chicago, our home community. We also are exploring new impact investing initiatives related to the Foundation’s domestic and international programs.
To track the financial, organizational, and programmatic progress of impact investment recipients, we use expert consultants and third-party resources such as the CDFI Assessment Rating Service, Calvert Social Investment Foundation, and PolicyMap, which is conducting annual surveys of the 40+ practitioners supported through Window of Opportunity. Formal evaluation and assessment of Foundation PRIs in the past has included:
- a comprehensive, formal evaluation of the program’s first 15 years (2000);
- an assessment of conservation-oriented PRIs made during the 1990s (2003);
- a strategic review of the CDFI field (2006);
- an early look at the impact of the NEXT Awards for Opportunity Finance (2011); and
- an assessment of the PRIs awarded immediately after Hurricane Katrina (2013)
Ongoing and upcoming projects include a review of our investment in a dozen Community Development Venture Capital Funds that now have reached the 10-year mark, and a comprehensive evaluation is underway to examine the impact of the Window of Opportunity initiative.
Updated May 2014