Wading In Taking it One Deal at a Time

Other foundations have moved more cautiously, withholding the decision to pursue a PRI strategy until they have made one or two pilot investments. Even the most supportive board members may need to be convinced, and a go-slow approach can be a good way to demonstrate the effectiveness of PRIs without making major commitments of effort and capital. Several small foundations stood waist-deep for years, setting up a series of ad hoc investment teams that seized opportunities as they arose from the foundation’s regular grant making. Other foundations co-invested with other PRI makers but didn’t make a deliberate effort to learn the ropes.

The chief operating officer of a foundation on the West Coast described his organization’s initial foray into PRIs. Founded in 2002, the foundation has focused mainly on getting its grant-making operations up and running, but the board also approved a $6 million PRI budget. Instead of staffing up immediately, the foundation hired a consultant to coordinate due diligence and manage the contract negotiations for its initial program-related investments. In 2004, the foundation made its first PRI as a private equity investment in a well-regarded intermediary that provides capital for small businesses and microenterprises in developing countries. Like the organization that dove in, this foundation found an experienced foundation partner that had already invested in the intermediary. The experienced foundation shared due diligence, business modeling, and legal opinions, but the partnership didn’t have a strong mentoring quality. “It was sort of like having a lead investor,” the COO of the novice foundation recalled. “This was a blue-chip fund we were supporting, but having a co-investor gave us more confidence.”

Following the success of that first investment, the foundation is ramping up slowly, selectively favoring a PRI structure when it appears to work better than a grant. The PRI consultant was recently hired as a full-time employee, and he has begun to develop legal and due diligence capacities — yet, for now, the foundation is still taking it one deal at a time. “I don’t know how far it’s going to go,” the COO said, noting that the foundation doesn’t plan to add more staff members to its nascent PRI unit. Developing internal policies will be part of the work, the COO acknowledged: “What do we do if a grantee defaults on a loan? If we’re serious about getting paid back, what expertise and resources do we need to have on hand to restructure a deal? Those are decisions we need to make down the road.”