Program Related Investments: Why Aren’t More Foundations Using Them?

PRIs offer a tool for foundations to make an impact, while recouping dollars for new investments. It’s seemingly a win-win. However, only a small percentage of foundations are actually using them. And most of them are larger and well-resourced. Why is that?

The post explores the barriers to PRIs (including lack of awareness, expertise and infrastructure) and recommends solutions.

Overview of PRIs

Grantmaking is not the only way philanthropic institutions can better our communities. There’s another way to make a difference—Program Related Investments (PRIs). PRIs are a flexible financing tool that allow foundations to invest in solutions to social problems, while also recycling those dollars for new investments

PRIs originated as part of the US Tax Reform Act of 1969. They were exceptions to Section 4944(a) of the IRS Code – the rule that imposes an excise tax on investments that jeopardize the charitable purpose of a private foundation.

A PRI is an investment (e.g. loan, equity investment, or financial guaranty) made by a foundation to pursue its charitable mission rather than to generate income. The recipient can be a nonprofit organization or a for-profit enterprise.

To qualify as a PRI, the investment must meet three standards:

  1. The primary purpose must be to advance the foundation’s charitable objectives
  2. Income generation or appreciation of property cannot be a significant purpose of the investment
  3. The investment cannot be used directly or indirectly to lobby for political purposes

Over the years the IRS has updated its language around PRIs, and in 2016, the IRS published new guidance with expanded examples of permissible uses.

Advantages of PRIs

Unlike a traditional grant, which generates a positive social return but negative financial return, PRIs achieve both social and financial returns.

In this way, PRIs can be viewed as a more efficient use of philanthropic capital. Once the PRI is repaid, the money is recycled into new charitable investments and opportunities, though any principal returned from a PRI must be re-granted within a year.

PRIs complement traditional grantmaking. PRIs can be particularly useful in helping scale a solution, kick-start a project, and sustain a social enterprise with new capital. Foundations can also use PRIs to help lower the risk for other investors, helping nonprofits and social enterprises attract additional capital and partners, and help unlock needed credit for non-profits.

Moreover, a PRI is eligible to count against the 5% payout that foundations are required to make each year to retain their tax-exempt status, and they are exempted from the excess business holdings tax (generally imposed for investments that comprise more than a 20% interest in for-profit ventures) and the jeopardizing investment tax (generally imposed for investments that financially endanger the charitable work of the foundation).

PRI Usage

Less than 2% of the nation’s more than 87,000 foundations use PRIs. Our largest philanthropic players. are experimenting with this cutting edge tool, while the broader philanthropy community has taken longer to adapt.

While the last major study on total PRI usage in the U.S. was performed nearly a decade ago, a recent empirical study on PRIs indicate that community foundations and family foundations are less active in making PRIs than independent foundations. It also finds that newer and larger foundations (either in terms of asset or staff size) were more likely to use PRIs.

For example, the Ford Foundation –a PRI pioneer – has committed over $600 million for PRIs and sets aside an average $25 million annually for new investments. The Gates Foundation has allocated $1.5 billion in PRIs. The David and Lucile Packard Foundation has made over $750 million in PRIs since 1980. And the Kresge Foundation announced that it would put 10% of its endowment, or $350 million, into impact investing by 2020. Just to name a few.

Barriers to Entry

The Center for High Impact Philanthropy at UPenn asked what is deterring foundations from using PRIs and identified the following barriers:

  1. A lack of basic understanding of PRIs, including how they can help advance a foundation’s strategy;
  2. A lack of the requisite skillset to perform PRIs (e.g. financial and legal analysis);
  3. Difficulty measuring the success of PRI outcomes, due to gaps in data and technical expertise (legal and financial analysis infrastructure).

The foundations leading the way on PRIs have the resources to develop skills and capacity to deeply engage in a PRI strategy. For example, The Gates Foundation relies on a team of experts who work to negotiate term sheets and agreements and to address the legal complexities (e.g. drafting term agreements, ensuring compliance) involved in PRIs. Most foundations lack this expertise.

In sum, PRIs require another layer of due diligence and additional capacity that foundations might not possess or be capable of investing in. Which means fewer organizations are benefitting from PRIs.

Removing the Barriers to PRIs

The Center for High Impact Philanthropy suggests a couple of solutions that may help remove some of these barriers.

  1. Improve access to reliable financial and social outcomes data through a shared database;
  2. Develop a shared service of financial, legal and data experts to serve as a resource for foundations;
  3. Develop mission investing expertise and capacity to educate current and future leaders in the non-profit and philanthropic sectors.

The field also needs increased efforts to raise awareness of PRIs as a plausible tool – particularly for smaller and mid-sized foundations. The current research is outdated. An updated study indicating how PRI usage has changed since the IRS has updated the rules post-2010, and illuminating how smaller foundations make use of PRIs, may help inspire others to adapt strategies that may be more feasible for a foundation’s capacity and governance limitations.


Our world faces mounting, intractable social problems in the face of constrained resources. PRIs offer a tool for foundations to make bigger bets, take more social solutions to scale and leverage foundation dollars in new ways. However, if the sector wants to support the use of PRIs, it needs to remove some of the barriers to entry, including investing in education, training, and shared resources. Doing so may help encourage smaller and mid-sized foundations to start integrating PRI models into their philanthropic strategies.