When the Gates Foundation last year made a $10 million investment in Liquidia Technologies, a Research Triangle Park, N.C.-based drug company, it set off a firestorm of controversy in the nonprofit world.

The foundation is known worldwide for its charitable donations-indeed, Bill Gates has joined with Warren Buffett in famously pledging to donate at least half of his fortune to charitable causes. Yet here was an investment-in a for-profit company, no less. Venture capitalists, in fact, had already invested $50 million in the company.

But was it really an investment by the Gates Foundation, in the traditional sense? Not exactly. It was a so-called program-related investment, or PRI, which means that the investment was aimed at furthering one of the foundation's causes and counted toward its 5% charitable distribution.

PRIs are only available to foundations and not widely understood. The main purpose of these investments must be charitable, so most PRIs-which can take any form of debt, equity, or guarantee, etc.-have been designed as low-interest loans to nonprofits.

The U.S. Internal Revenue Service lists the following as typical examples of program-related investments:
Low-interest or interest-free loans to needy students.
High-risk investments in nonprofit low-income housing projects.
Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available.
Investments in businesses in deteriorated urban areas under a plan to improve the economy of the area by providing employment or training for unemployed residents.
Investments in nonprofit organizations combating community deterioration.

But PRIs can take other forms, and extend to a much wider array of causes. The Gates Foundation investment in Liquidia, for example, was to support the company's development and commercialization of safer and more effective vaccines and therapeutics.

PRIs have been used to finance real estate for affordable housing, charter schools, community health centers and conservation organizations, among other things. They can be in the form of CDs in community banks to equity-like investments in for-profit companies, such as those that sell clean technology or deliver access to water in the developing world. They can also include the highest-risk tranches in massive development projects involving partnerships between governments and organizations, such as OPIC, banks, insurance companies and pension funds. They are considered by many to be the bedrock of the highest social impact do-good investing.

"[Senior lenders such as banks or insurance companies that receive market-rate interest] in these wedding-cake deals have enhancement from PRIs, and that's incredibly powerful," says Christa Valesquez, former senior fellow at the Initiative for Responsible Investment at Harvard University and former director of social investments at the Annie E. Casey Foundation.  "Who else is going to provide a safety net to be repaid behind and take half of what they are getting [in interest]? It's counter intuitive for everybody else."

In addition to providing financing for socially beneficial projects, PRIs provide leverage that can spark the involvement of market-rate private capital. In a speech to the PRI Makers Network (now the Mission Investors Exchange) conference four years ago, MacArthur Foundation President Jonathan Fanton said every PRI dollar spent on the foundation's housing preservation initiative had unlocked $70 from public and private sources.

"Since 2001, we have awarded $50 million to preservation-minded developers and lenders across the U.S.," he said. "By the end of [2007], these groups had used our dollars to marshal over $3.5 billion in new long-term financing-enough capital to acquire, improve and preserve 50,000 at-risk affordable homes."

"One to 70," he added. "[That's] dramatic leverage by anyone's count."

But here's the kicker: When foundations make investments that further their charitable goals, the principal must be recycled as yet another grant-or PRI. In this way, foundations can compound their do-good impact.

Is it any wonder that the Gates Foundation has increased its PRI budget from $400 million to $1 billion?

This is a two-part series about PRIs. In part one, we will trace their evolution as a form of social venture capital, focusing on their use in the nonprofit world. In part two, we will address the issues raised by using PRIs in the commercial world, and show how they are being used to transform for-profit companies and even entire industrial sectors.

Legalizing Philanthropic Investment
Although PRIs can be traced back to 13th century England, their origin in this country is said to be a revolving-loan fund endowed by Benjamin Franklin to provide start-up capital to artisans and young tradesmen. Rather than bestowing gifts, the idea was that repaying loans at 5% would ensure that the funds would be available for future generations. According to Global Impact Investing Network CEO Luther Ragin, who described this fund at a PRI Makers Network conference in 2006, the trust's default rate was so "staggeringly" low that the value of the endowment had mushroomed nearly 17-fold by 1990, when the cities of Philadelphia and Boston split the remainder of the trust.