Social impact investing allows foundations to support their charitable missions beyond just grant making. While charitable grants are rarely repaid, investments in social enterprises have the potential to generate a financial return for the foundation, thereby boosting the pool of money available for future grants or investments. Both PRIs and MRIs provide some level of financial returns from the social enterprises they invest in. But PRIs and MRIs are characterized and treated differently by the Internal Revenue Service.
PRI
A PRI can be counted, along with grants and program support costs, towards the 5% minimum payout required for private foundations annually. The returns on the investment, in the year they materialize, are added to the 5% minimum payout requirement for that year, which serves to recycle the philanthropic capital.
What’s more, there is no limit on the actual return on a particular investment, as long as charitable purpose is the primary consideration when making such investment. There are no prescribed limits on the size of the investment, the type of investment vehicle or the type of enterprise receiving the investment.
A review of data from the Mission Investors Exchange, a group comprised of 230 foundations and mission investing organizations, shows that the size of PRI commitments varies considerably: from $20,000 to $76 million (See Chart B). Investments can and have been made in a wide range of entities including small non-profit organizations, biotech startup businesses and publicly traded corporations.
MRI
An MRI both furthers the philanthropic mission of the foundation AND seeks to generate a competitive rate of return. Similar to a PRI, an MRI can be made in any asset class; however, since it is not designed to meet the IRS requirements to qualify as a PRI, the MRI will not count towards the foundation’s annual 5% payout requirement. MRIs have been little used to date, in part due to fear of violating “jeopardizing investment” laws, which require foundation managers and directors to avoid investments “that show a lack of reasonable business care and prudence in providing for the long- and short-term financial needs of the foundation.”
In 2015, the IRS clarified the rules by indicating that it is not a jeopardizing investment just because foundation managers consider social impact consistent with the foundation’s mission when making the investment. They “are not required to select only investments that offer the highest rates of return, the lowest risks, or the greatest liquidity so long as foundation managers exercise the requisite ordinary business care and prudence under the facts and circumstances prevailing at the time of the investment in making investment decisions that support, and do not jeopardize, the furtherance of the private foundations charitable purposes.”
CHART B
Median PRI/MRI outlay is $250,000 to $1.18 million
The investments can be of any size. For example, PRI/MRIs in Education (EDU) can range from a low of $25,000 up to $76 million. (Chart note: the vertical line indicates the minimum and maximum investment; the top and bottom of the rectangular box indicate the 1st-3rd quartile.)
Source: Center for High Impact Philanthropy analysis of Mission Investors Exchange data