Program-Related Investing

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Program-Related Investing
Grantmakers in Health The Art Science of Health
Grantmaking

• Kate Starr
• Investment Officer
• FB Heron Foundation
• New York, NY

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THE F.B. HERON FOUNDATION MISSION-RELATED
INVESTING CONTINUUM
Should a private foundation be more than a
private investment company that uses some of its
excess cash flow for charitable purposes?
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Below-Market Investments
Fixed Income
Private Equity
Public Equity
Cash
Guarantees
Senior Loans
Grant Support
Cash
Subordinated Loans
Equity
Market-Rate Investments

• Using assets to support mission
• 29.7 billion in grants 500 billion in assets
• Expanding the Philanthropic Toolbox
• Grants as part of a spectrum of tools
• Maintaining investment discipline
• The value of incrementalism
• Conforming with asset allocation policy
• Use of benchmarks and prudent underwriting
  practices (including third-party reviews)
• Partnering with others to increase impact
• Co-investing, joint underwriting, syndications

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Below-Market Investments
Fixed Income
Private Equity
Public Equity
Cash
Guarantees
Senior Loans
Grant Support
Cash
Subordinated Loans
Equity
Market-Rate Investments

• Why make PRIs?
• Can achieve greater impact than with grants
  alone
• Promotes better management
• Places organizations on a more sustainable path
• Hastens convergence
• Improves a foundations asset management

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• Below-market deposits in low-income designated
  credit unions (n996) to increase the capacity of
  these member-owned institutions to provide
  financial services to members.
• Direct placement vs. placement through
  intermediaries.

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• Typical program-related investments made to
  non-profit CDFIs, CDCs or others for a term of up
  to 10 years at interest rates of 1 to 6.
• PRIs support affordable housing and
  homeownership, enterprise development, child care
  and community facilities, and other strategies.
• Often signal other investors and lenders.

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• Subordinated debt (with respect to right of
  repayment) may include secondary capital to a
  credit union, trust preferred securities to a
  community development bank, or so-called
  equity-equivalent debt (EQ2) to a CDFI or CDC.
• Terms are generally longer than senior debt and
  pricing may be higher.
• Key rationale for subordinated debt is leverage.

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• Includes limited partnership interests in
  community development venture funds (including
  New Market Venture Capital Companies and Rural
  Business Investment Companies), preferred or
  common stock investments in community development
  banks, and land purchase for conservation or
  other purposes.
• Often assumed (incorrectly) that equity
  investments cannot be PRIs. What is charitable
  and concessionary in the context of an
  investment in a for-profit?
• Strategies to limit return

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• Relationship of PRIs to grantmaking.
• Programmatic alignment
• Differences between PRI-making and grantmaking.
• Focus on financial capacity
• Management bench strength
• Are PRIs always part of the grants budget?
• The dual character of PRIs charitable
  distributions and asset management tool

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• Some key learnings from PRI-making
• Be serious about being repaid (moral hazard
  issue)
• Invest with those you know
• Consider intermediaries versus direct investments
• Use third-party reviews to increase quality of
  underwriting and build capacity
• The process doesnt end at the closing
• You dont have to do it alone

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Follow-up Information

• Website http//www.fbheron.org
• Viewbook on MRI http//www.fbheron.org/viewbook_f
  rontiers.pdf
• PRI Makers Group http//www.nfg.org/about/pri_mak
  ers.htm
• PRI Makers conference Jan. 18-20, Palo Alto
• Contact information kstarr_at_heronfdn.org
• [phone]