Franklin lacked a formal name for his funds, but today the philanthropy world would call them program-related investments, or PRIs. Foundations of all sizes are using these devices with growing frequency, structuring them as loans, equity positions or loan guarantees, in place of more traditional grants. The idea has appeal for donors who believe in entrepreneurial philanthropy and who are on the lookout for causes that can prove their merit through an ability to generate revenue—such as an affordable housing complex that will produce rental income, or a business to train young people while turning a profit. Ideally, the money benefits programs that are too risky for commercial lenders, and is at interest rates well below those offered by banks, usually between 0 and 4 percent.

Foundations find PRIs useful because they can recirculate money from repaid loans, though the likelihood of repayment is often hard to gauge. Many of the foundations that have embarked on these programs have, among their staff or board members, bankers or former bankers who can cast a professional eye upon the loan applications. Precious little research is available on either efficacy or risks, although a leading consulting firm on the subject, Brody Weiser Burns, has compiled anecdotal information on its website, www.brodyweiser.com. Various individual foundations have reported default rates that range from 0 to 15 percent. Some foundations say they have never lost money on these loans.

The financial rigor inherent in PRIs is one of their selling points. “There’s a certain amount of discipline that debt enforces on an organization about how they do their work,” says John Colborn, deputy director of economic development at the Ford Foundation. “And once they demonstrate that they are able to pay back loans to us, they are able to go to other institutions and borrow larger amounts.”

Ford pioneered the modern incarnation of PRIs in 1968, after receiving a request from an organization that wanted to employ minority youths to renovate a building. In its early years, Ford extended PRIs with a recklessness that only the world’s largest foundations could afford, funding everything from a catfish farm to a fruitcake bakery. A full one-third of its loans defaulted. “We were investing in businesses for job creation, but we’re not business investment people,” Colborn confesses. Led by Ford, and later by the John D. and Catherine T. MacArthur Foundation, PRI practitioners went on to develop strategies to cut risk. (See "Reducing the Risk"). The trend took off from there. In 2002, the latest year for which there is data, foundations invested $249.4 million through PRIs, almost twice as much as in 1992, according to the Foundation Center in New York.

A Regulatory Hybrid
Under foundation law, PRIs differ significantly from grants. They may be counted toward the 5 percent of assets that a foundation is obligated to disburse each year, and therefore they must be awarded for charity instead of profit. Generally, that means loans or bonds have to bear lower interest rates than those available commercially. (A related term, mission-related investing, encompasses both PRIs and market-rate investments to credit unions or other institutions performing good works.) When a recipient pays back part of the principal of a PRI, it is counted as a negative grant—the foundation must spend that much more on top of its 5 percent payout to remain in line with the law. At the same time, PRIs act like investments in that the IRS counts loan interest as taxable income. Should a beneficiary default on a PRI, it at least helps the foundation meet its legal payout requirements.

States may impose further restrictions, particularly for foundations organized as trusts. The vast majority of foundation leaders seek advice from legal counsel and regional grant-making associations before embarking on a PRI program.