Program Related Investments (PRIs) for United States Foundations Overview

More and more wealthy families are interested in using their family assets, their private family foundations, and their donor-advised funds to do more than traditional grant making. They are looking instead to make loans to charities, and loans to‑‑and even equity investments in‑‑for-profit entities that are furthering charitable purposes. By adopting the program-related investments (“PRIs”) approach, a foundation and other investors have an opportunity to recycle the funds as they are repaid, for additional charitable purposes, thereby potentially increasing the long-term impact of their charitable assets.

This article provides information about the mechanics of PRIs, especially from a compliance context for foundations. Even so, there is much that can be adapted from PRIs that can be useful to other investors wanting to advance charitable purposes and outcomes while also preserving, even growing, and eventually recycling their investment.

Who is the PRI investor?

From an IRS compliance standpoint, we generally are talking about private foundations – that is, nonprofit corporations (or trusts) that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code (the “Code”) and that are classified under Section 509(a) as private foundations. To be clear, though, Section 501(c)(3) public charities, including their donor-advised funds, could also take advantage of these investments, as can others.

What is a PRI? What are its advantages for a foundation?

A PRI is an investment that a foundation makes from its charitable pool of assets, not from the assets it intends to invest for purposes of growing the endowment. Therefore, a PRI is not subject to traditional investment policies and prudent investor standards. Nor is a foundation required to limit its levels of ownership as required by the “excess business holdings” rules, although they still must comply with the self-dealing and co-investment rules.

A PRI counts towards satisfying a foundation’s required five percent minimum distribution requirement. Unlike a grant that a foundation does not expect to see any money from, a foundation must understand how to treat money returned to it pursuant to a PRI. That money is of two types: (1) return of the principal or invested amount; and (2) distributions or payments of interest, dividends, or appreciation over and above the first category. Category one returns increase the annual payout obligation of the foundation for the given time period such that the foundation must payout at least 5% for that period plus amounts returned as category one payments. Category two payments are treated as investment income to the foundation, just like any other investment income. Losses — that is returns and payments that do not equal the category one principal or invested amount — are not available to reduce endowment or gains from unrelated business taxable income on which taxes must be paid.

A PRI must satisfy all three of the following tests:

  • The investment must further one or more charitable purposes of the foundation such that “but for” the investment’s connections to the foundation’s charitable purpose it would not be made. This is a determination specific to each foundation, its mission, and the proposed PRI;
  • The production of income or the appreciation of property may not be a significant purpose of the investment; and
  • As is true of any foundation grant, the PRI cannot be used to fund electioneering or lobbying activities.

In addition, when the investment is made in a for-profit entity, the foundation must exercise “expenditure responsibility” over the investment, which involves careful due diligence before making the investment, correct provisions in the investment documents, reporting back to the foundation on the use of funds, proper reporting on the tax return, and follow-up with the investee if it is not properly spending the invested funds.

For additional information on expenditure responsibility, please see the following publications by Adler & Colvin:

Certainly, as the preceding makes clear, foundations have regulatory reasons for complying with these requirements. Other 501(c)(3) organizations can also benefit from adopting these requirements as aids in fulfilling their own legal obligations to ensure charitable use of their assets and to protect against impermissible private benefit. For other than 501(c)(3) investors, adaptations of the above approach can contribute to their objectives, especially approaches to due diligence, reporting, and accountability.

How does a PRI satisfy the charitability requirement?

First, the investment must be intended to further a recognized charitable purpose under Section 501(c)(3). Note that the activity being funded does not have to qualify under Section 501(c)(3). Classic PRI examples include funding a for-profit bank or grocery store in a poor or deteriorating neighborhood that does not have access to these services. Running a grocery store or bank is not charitable, but relieving poverty, giving underserved people easier access to healthy food, combatting community deterioration, and helping communities without access to safe banking, are charitable purposes.

Second, the purpose must be one that is within the foundation’s mission. A foundation whose purposes are limited to supporting public television would not want to make a PRI to put a grocery store in an underserved community.

The Kauffman Foundation has developed a charitability term sheet as an example of how a foundation structured a particular investment to further its charitable mission and ensure accountability thereto. The example involves investing in a private equity fund(s) targeting activities to provide capital to under-represented and underserved entrepreneurs. That is, those who are of color or are women unable to attract capital from traditional sources because of those characteristics and to entrepreneurs whose companies operate in economically disadvantaged areas.

How does a foundation demonstrate that no significant purpose of the investment is profit-oriented?

There is no requirement that the investment fail or that it does not generate a profit – potentially even at market. The test, rather, is one of intent or purpose. Is this the type of investment that the foundation would make under its own investment policy and investment standards? Will other market participants likely participate on the same terms and conditions? If so, then it is not likely going to satisfy the ‘no significant purpose’ test. Some of the factors that foundations should consider in favor of satisfying this test include:

For PRI Loans and Guarantees:

  • a lower than market interest rate;
  • no security or weak security;
  • subordinate positioning relative to others;
  • banks and other commercial lenders are not willing to loan on these terms; or
  • the loan is needed as a catalyst for equity investors.

For PRI Equity Investments:

  • insufficient commercial investors are willing to invest generally or on these terms;
  • high risk investment, with limited liquidity or risky exit; and
  • the investment is needed as a catalyst for obtaining loans or other investments.

Complying with this second prong of the PRI elements must be balanced with protecting against others unduly benefiting from the foundation’s positioning. Impermissible private benefits must still be avoided.

Authored by:

Robert A. Wexler; Principal; Adler & Colvin

John E. Tyler III; General Counsel, Secretary, and Chief Ethics Officer; Ewing Marion Kauffman Foundation

Catalytic Capital

In essence, catalytic capital is investment capital (debt, equity, guarantees, etc) with which the investor accepts reduced financial expectations in order to bring about a greater social or environmental impact.  Lowered financial expectations refers to not only higher risk or lower return profile, but also a longer liquidity window or subordinate position in the investment structure than a more conventional investment. Other terms for this type of capital include concessionary capital, patient capital, and flexible capital, among others.

Catalytic capital fits in the middle of the spectrum of capital, which demonstrates a gradation of investor return expectations, from 100% loss (a grant) through commercial returns at rates set in accordance with conventional financial benchmarks that do not price in “externalities” (conventional equity investments). It can work to fill critical gaps for social entrepreneurs, particularly in early stages of development. It can also encourage third-party investment that may have not been otherwise possible (e.g. a development finance institution taking a subordinated position to entice private investors). 

Tideline, an impact investing consulting and research firm, warns: “Capital willing to accept disproportionate risk and/or concessionary returns is in short supply and can have market-distorting effects if not deployed appropriately. Evaluating potential positive and negative impacts of catalytic capital (including its built-in financial concession and the activities it supports) is essential to its effective use.”

See also:

Would you like to add to this article? Do you have examples of how to deploy catalytic capital appropriately? Please reach out to the Impact Terms team about contributing.

Additional Resources:

Social Enterprise

A social enterprise is typically understood to be a for-profit business or a business within a non-profit organization that has a specific social or environmental mission included in the business plan. U.S.-based Social Enterprise Alliancel defines social enterprises as:  “Organizations that address a basic unmet need or solve a social or environmental problem through a market-driven approach.”

This definition is left intentionally vague, as it must cover a wide variety of approaches and structures. Some operate within traditional structures and follow traditional exit paths, whereas others opt for alternative structures

See also: 

Would you like to add to this article? Please reach out to the Impact Terms team about contributing.


  1. Social Enterprise Alliance

Revenue Based Financing

Revenue Based Financing is the most popular form of contingent payment structures and is often used as an alternative exit structure.

Revenue Based Financing structures are contingent payment instruments that dedicated a percentage of revenues as the source of returns to investors.  The structures are typically designed to stop paying investors when the investor has received the negotiated target return. Typically, that negotiated return is expressed as a multiple of the initial investment.  For example, investors seeking a 3X return target that has invested $100,000 would receive their share of revenues until the investor has been paid $100,000 X 3 = $300,000. It’s important to note that the investors return on capital will depend on the timing of the payments – and thus will depend on the rate of revenue growth.   The same 3x return target will have a much better return on capital if the company has fast revenue growth compared to the same company if it experiences slower revenue growth.

Revenue Based Financing can either be set up as debt or equity structures depending on the local laws.  When using equity they are typically Redemption Based Exits in that the issuer is obligated to repurchase the equity from the investor at a specified premium.  In Revenue Based exit Structured as debt, the payments to the investor are treated as a mix of interest and principal payments.

Key Considerations for Deal Structuring

Legal and Accounting Considerations


Complexity is an important consideration when seeking the most appropriate capital for a company.  If the needs for capital are appropriately met with traditional structures then using traditional structures will likely reduce transaction costs and investor reticence.

Many of the alternative exit structures are new, are not well understood by many practitioners, and have less clarity about their tax, accounting, and legal merits than traditional exits.  These complexities can add costs and slow the transaction process.

Equity vs Debt

It’s important to understand that just because a security is labeled as “equity” or “debt” does not mean that the local tax authorities will accept that label.  It is common for tax authorities to have procedures to reclassify securities based on their economic structures.  Any reclassification could significantly change the economics of the security and/or increase the difficulty of accounting and other compliance elements.

We recommend any investor or entrepreneur seeking to use an alternate exit structure seek professional advice on the tax implications with a specific focus on reclassification risk.

Usury Laws

When an alternative exit uses a debt structure or a structure that could be reclassified as debt issuers must be careful that the nature of the contingent payments don’t violate local usury laws.  Usury laws are laws that set a maximum interest rate on debt payments.

What is interest vs principal?

When an issuer pays an investor some return on a debt structure it needs to be clear to both parties what portion of the payment is interest and what portion is principal.  This distinction is important because generally the return of principal is not taxed but the interest is subject to taxation.

Traditional investment structures calculate the principal and interest portions of a payment using near-universally accepted amortization tables.  With many alternative exit debt structures it is not clear how to create an amortization table that is accepted by the local tax authorities.

For example, consider a debt based alternative exit where the source of returns is a fixed percentage of revenues until the investor receives 3 (three) times their initial investment (a revenue based contingent payment).  If the investor invested $100,000 then when the transaction has completed its duration the investor will have received $300,000 in payments of which $100,000 has to be treated as return of principle and $200,000 has to be treated as interest..  If the first payment is $10,000 – what portion of that is principal and what is interest?  It might make sense to call ⅓ principal and ⅔ interest.  It also might make sense to call the entire $100,000 of payments principal and then all the rest interest.

While it is possible that your local tax jurisdiction will not have clear rules, it is more likely that they do have rules for properly apportioning principle and interest because not having those rules would have made it easy for investors to take advantage of their absence and create investment structures that are intended to delay, defer or avoid taxes.

Complicated accounting requirements

Some tax jurisdictions solve the above referenced question of apportioning interest and principle by imposing complicated tax accounting methods that can be burdensome to administer and may even create tax disadvantages to the investor.

For example, in the United States the law (26 CFR § 1.1275-4) requires contingent payment instruments to be treated as if they were not in fact contingent using the Noncontingent bond method. In addition to the added complication, this often has the negative consequence of requiring, in the early years of an investment, the investor to pay tax on income they will not receive until the later years of the investment. This article goes into more detail on taxes and revenue-based or other similar contingent payment instruments in the US – we highly recommend reading that article if you considering these structures in the US.

Distribution rules (eg re dividends and Board approval)

Local lay may have rules that need to be carefully considered when using equity instruments for alternative exits, especially when using a dividend as part of the structure.  Traditionally dividends may need to be authorized by the board and their may be restrictions on payment if the issuer does not have retained earnings.

Downside Protection

Traditional investment structures have clause for when the investment does not perform or when the company is forced to restructure or close.  The order in which creditors and investors get repaid in those cases is one of the negotiable features of term sheets but is generally based on the overall structure of the transaction with debt having higher preference than equity.  To the extent that an alternative exit has an economic structure that is different than its legal structure (eg a debt based exit that offers equity returns) the parties need to consider the appropriate downside protection.

Considerations by Legal Jurisdiction

The key questions that you need to ask to figure out what exit structures work in a given local legal system:

  • Do the tax authorities have rules for reclassifying debt as equity (or vice versa) – that is, is it possible that designing a debt instrument that pays variable payments (eg revenue based) would be reclassified as equity
    • if those rules exist you may need to create an equity structure
    • if those rules don’t exist then,
      • how are contingent payment debt securities taxed and accounted for.
        • how is each payment split between the return of principle vs interest? (need to know for investor and issuer – may not be the same)
        • are there rules that force contingent payment debt instruments to be accounted for in a way that may create phantom tax (in the US, for example, you have to act as if the payments were non contingent and create an amortization schedule and make tax payments based on that schedule – not just on what each payment ends up being)
    • Could designing an equity structure with mandatory redemptions be reclassified as debt
      • if yes this loops back to the questions re debt payments above
      • if no then equity with mandatory redemption contingent on (revenue %) is an easy option

Additional Resources

Blended Finance

What is Blended Finance?

Blended finance is the term used when public or philanthropic funds are used to catalyze private capital investment (particularly in frontier markets). It has been envisioned as a way to help bridge the funding gap to achieve the UN Sustainable Development Goals, leveraging public and philanthropic capital to bring more private capital to the development finance table. Typically, the public or philanthropic entities provide a type of concessionary and catalytic capital that lowers the risk profile of a particular investment for the commercial or private entity. This allows the entities to invest together while allowing different parties to define their measure of success. 

Blended finance is not limited to a specific transaction type, but instead is a structuring approach with three key characteristics: 

  • Impact, particularly in regards to the SDGs, is a motivating factor in the transaction
  • Financial returns are expected, although different parties may have different return expectations
  • Public or philanthropic capital is leveraged to act as a catalyst for the addition of private capital. 

How are blended finance deals structured? 

  • Grants – public/philanthropic partner gives money to support the project that has no expectation of being repaid. These funds can be used to support non-income generating activities or early stage preparations. 
  • Guarantees – public/philanthropic partner offers protection (often in the form of insurance) from capital loss. (lowers the risk or increases the credit rating)
  • Technical Assistance – public/philanthropic partner offers direct support to an entrepreneur, typically through a technical assistance facility or an incubator. 
  • Junior Equity – public/philanthropic partner buys ownership in the investment, but accepts a subordinate position in the structure, effectively accepting higher risk for lower returns. This structure is also sometimes referred to as concessional or first-loss capital. 
  • Flexible Debt – similar to junior equity, the public/philanthropic partner can accept subordinate terms to the debt structure, allowing for more favorable terms than the market offers. 

All of these strategies act to reduce the riskiness of an investment for private investors, thus leveraging the public or philanthropic funds provided to accomplish certain SDG goals. 

Chart from WEF/OECD

What are some examples of Blended Finance structures?

Convergence is a global network that was launched in 2016 to focus on blended finance. The organization maintains a database of blended finance transactions, including the following types, outlined in the table below:  

Transaction with concessional development fundingDevelopment agency invests concessional debt or junior equity into a fund, improving risk-adjusted return for private investors
Transaction with market rate public and private investmentPublic and private investors invest in a structure either pari passu or in
different tiers, but at pricing fully reflecting seniority, tenor and other
Grant-funded TA facility
alongside transaction
Commercial fund has associated grant-funded Technical Assistance
facility to build pipeline and support impact
Below market-rate risk miti- gation provided by
development funders
Development funders provide guarantee to bond issuance to improve
credit rating and attract private investment
Impact BondPrivate investors provide working capital for set of interventions and are repaid with a return by development funders if intervention achieves
pre-agreed results
Advance Market
Development funders guarantee a market for a product, incentivizing
private investment
Project Finance Facility Facility that only provides grant funding to infrastructure projects to reach bankability with the ultimate goal to attract private capital to projects;
underlying transactions considered blended
Transaction with grant funding for design and launchDevelopment funders provide grant funding for vehicle design and


Who is doing blended finance? 

According to Convergence and their data: “The most frequent private investors are asset/wealth managers and private equity/venture capital firms. The most frequent public investors are development finance institutions, governments, and multilateral groups. The most frequent philanthropic investors are private foundations.”

Further Resources

The GIIN’s Blended Finance Working group has published a helpful resource with key considerations and questions for stakeholders of blended finance deals:

More information about blended finance can be found at the following websites: 

Appropriate Capital

This article is still under development. If you would like to contribute to this article please contact us

Appropriate Capital refers to the goal of finding the right capital structure to balance the needs of the investor and entrepreneur.

Many traditional financing methods are not Appropriate Capital.  For example, debt forces a company to pay at a specific schedule but would not be appropriate for a company that can not predict if their business performance will match the debt schedule.