Philanthropy Beyond Grantmaking
In the past 10 years, private foundations have increasingly adopted a “full portfolio” approach to pursuing their missions.
Rather than considering only the grants they can make for charitable purposes, they are deploying their endowed assets to invest in B corporations and for-profit social enterprises that are aligned with their program strategies; participating as activist shareholders to promote causes such as human rights, clean energy and gender equity; and sharing their physical spaces with startups and collaborators to help nonprofits take advantage of foundations’ infrastructure.
Now a new Minnesota nonprofit, the Venn Foundation, is offering a streamlined approach to using an underutilized tool in philanthropists’ tool kits. Venn aims to provide the outside expertise and legal structure that will allow philanthropists to make more loans. Specifically, Venn will focus on facilitating program-related investments (PRIs): below-market-rate loans that can provide flexible working capital for a range of causes. To understand why this is an interesting business model for Venn, which was a 2017 Minnesota Cup impact award winner, we’ll have to back up just a bit.
Federal regulations dictate requirements for grant spending and other elements of private foundations’ operations. For example, endowed foundations must spend 5 percent of their average net assets annually for charitable purposes. Only certain expenses qualify for what’s called “payout.” Payout can include grants and directly related program and administrative expenses. Investment management and brokerage fees are not qualified charitable expenses.
In 1969, regulators added PRIs as a new qualifying expense to foundations’ portfolios. The full loaned amount of a PRI is considered a qualifying expense in the year it was made. The intent of adding PRIs as qualifying expenses was to give foundations more ways to invest in and advance the nonprofit sector, expand the sector’s access to capital, and give foundations an ability to make loans to nonprofits with greater risk than a bank or investment firm might be willing or able to tolerate.
Breakdown of Qualified Charitable Distribution (QCD)
For All Minnesota Private Foundations Combined In Fiscal Year 2014
Charitable Administrative Expenses (CAE)
Acquisition of Direct-Use Charitable Assets
Set-Asides for Charitable Projects
Total Charitable Distribution
However, use of PRIs has been generally low, for many reasons. Understandably, foundations have considered the due diligence required for a loan more complicated than for a grant, and they are often not staffed to do the additional risk analysis. PRIs typically require a different form of legal agreement and different monitoring practices (grant agreements are routine, loan agreements are not). And, with relatively low availability, many nonprofits have not considered asking for PRIs. Further, many in nonprofits see a grant as preferable to money they’d have to pay back, even with the below-market terms associated with PRIs.
The enterprising young Venn Foundation will insert itself into this field of practice. By specializing in PRIs, Venn will seek money from foundations, corporations and individuals who specifically want their money to circulate in the sector through PRIs. Venn will provide up-front due diligence, monitoring, coaching and any other hands-on assistance that borrowers may need. Further, Venn has built in the flexibility to make loans not only to nonprofits but also to mission-driven businesses that need “slow capital” to do their work.
In March, Venn released The PRI Pulse, a comprehensive report documenting Minnesota foundations’ use of PRIs from 1998 to 2016. The report was compiled by reviewing Minnesota foundations’ federal tax returns. Venn searched for PRIs made, by whom and for what purposes and organizations.
The PRI Pulse contains a rich analysis of subjects beyond PRIs, such as documenting the growth in the number of private foundations in Minnesota and analyzing the charitable administrative expense for these foundations over time. Venn’s research shows that the vast majority of Minnesota foundations are small, unstaffed entities (about 81 percent of foundations spent less than $10,000 on charitable administrative expenses in 2014, for example). Further, over half of the private foundations in 2014 did not exist in 1998 when the study began.
Private foundations entered into 554 PRI deals during the study period, investing about $164 million in these loans. Education, housing and economic development led the reasons for the loans. This compares to the $1.18 billion foundations provided in grants during the same period.
The Venn study thus confirms what many would have predicted: that PRIs are underused as a financial instrument among private foundations. But Venn’s founder Jeff Ochs says, “Given that [underutilization], what we did find is more activity, and more diverse activity than we expected. I was pleasantly surprised by what we discovered—in terms of the variety of actors by size, issue focus, recipients and structures of deals.” Ochs believes that the examples of successful PRIs highlighted in The PRI Pulse can help further demystify the process and encourage more exploration and experimentation with the tool.
“The tool itself is not new,” Ochs says. “The goal now is to use it more, as more organizations step into a social enterprise frame of mind and look beyond the straight donation model of supporting mission-focused businesses and nonprofits.”
Sarah Lutman is a St. Paul-based independent consultant and writer for clients in the cultural, media and philanthropic sectors.