Program-related investments, part two: Trust and transparency

In Part 1 of this blog series I explained what program-related investments (PRIs) are and under what circumstances the foundation makes them. So how does the foundation decide to make PRIs? We don’t have an application, but a standardized process is followed.

Typically, the foundation learns of a PRI need through a current grantee. For example: land trust grantee The Conservation Fund (TCF) called our program staff and mentioned that their organization was in negotiations to purchase a conservation easement using installment payments. TCF had identified and secured most of the funding, but the seller required a third-party guarantor to cover any missed payments by TCF.

Okay, so a grant wasn’t needed. Our next step was to ask that TCF (the potential investee- note that the relationship name is not “grantee”) submit a brief written description of the project. The narrative explained the work’s relevance to both TCF’s and the foundation’s interests, the intended outcome and timeframe of the project, and who would do the work.

GDDF and the potential investee together drafted a revenue and payment cash flow projection for the project. With a guaranty, as with a loan, the foundation tries to determine if the project will have sufficient funding over the PRI time period to make the required payments – in this case to the easement seller. Since GDDF would be on the hook to cover the payments, we tried to mitigate risk upfront by fully understanding the financial in- and out-flows of the project.

The projections looked satisfactory, so we continued the due diligence process by requesting other general and deal-specific materials, some of which included:

• TCF’s most recent audit, balance sheet, income statement and budget

• Transaction-specific documents such as purchase and sale agreements, memorandums of understanding, and draft conservation easement

• Investee board resolution approving transaction

• Donor/funding source confirmation letters or letters of commitment

Next, GDDF program and finance staff drafted a write-up, or offering memorandum, which included a project summary, transaction terms, risks, and a list of reviewed due diligence items. The memorandum was shared with TCF before it was sent, together with the due diligence materials, to the foundation’s outside legal counsel for review. After legal clearance, we presented the offering memorandum to our finance & investment committee for review/approval. The transaction was approved, so PRI agreements were drafted by the foundation staff and outside legal counsel and executed by both sides.

But the process didn’t end there. After the PRI was made, monitoring kicked in and continued through the end of the PRI/project term. Monitoring typically consists of quarterly check-ins: emails and/or phone calls from the investee providing a brief progress report and an updated cash flow projection.

As you can see, while a PRI offers low-cost capital, it’s no small effort to qualify for or to manage such an instrument. Because the foundation expects to be repaid, the investor-investee relationship looks and feels different from the grantor-grantee relationship. It is a bankerly-like relationship based on mutual trust, full transparency and constant contact. But when done responsibly, PRIs facilitate the recycling of dollars, and the furthering of both GDDF’s and its partners’ missions.

For more information on PRIs, visit Mission Investors Exchange.

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