Nothing ventured, nothing gained.
In its first two years of making PRIs, the Ford Foundation's 1991 report says, it made loans to ventures ranging from "cattle feeding, fruitcake baking, and steel joist manufacturing to fast-food franchising, publishing, public transportation and catfish raising." After reviewing the investments, a consultant admonished the foundation to "stop thinking of a PRI as some sort of interminable experiment" and suggested the hiring of professional loan officers.
The foundation's losses on these early investments, which it made to inexperienced entrepreneurs in poor neighborhoods, amounted to 35%. In conventional venture capital, by comparison, the general rule of thumb is that investors will make a killing with one investment in 10, and that the rest of a VC's investments will either limp along as the so-called living dead (and perhaps contribute some financial return) or end in total bankruptcy.
But Ford's early PRIs 40 years ago also included a five-year $600,000 loan that helped launch the Harvard Community Health Plan, something that later became known as a health maintenance organization.
"One of the early lessons learned from successful loans was that they were most often in fields we knew very well-we knew the people and the players from our grant-making experiences," said a program officer in Ford's l991 report. "Many of our early losses were with the types of ventures that, in retrospect, we probably had no business being in because we didn't know the field."
That experience has been replicated by other foundations that began making PRIs as direct investments only to abandon them and make investments in intermediaries-a strategy that most foundations pursue today with PRIs. Between them, Ford and the MacArthur Foundations have invested hundreds of millions of dollars building the virtually invisible $30 billion industry of "community development finance institutions," or CDFIs-the community banks, credit unions, loan funds and venture capital funds that serve minority and low-income people.
For example: In 1989, MacArthur made a PRI to the Center for Community Self Help, a Durham, N.C.-based CDFI that, among other things, promotes responsible lending and has created a secondary market in responsible mortgages. At the time, it had $7 million in capital. Then, in the early 2000s, Ford made a $50 million PRI to Self Help-something one observer said was "a tad eye-opening for a lot of the world." Today, Self Help has over $1 billion in assets.
Even more eye-opening, perhaps, was the performance of CDFIs during the financial crisis. The Annie E. Casey Foundation has committed 5% of its endowment, or $125 million, to social investments. According to Valesquez, who directed Casey's social investments at the time, most of those investments are PRIs.
"When the foundation lost 25% [in 2008], our little piece of the portfolio was the only one making money," she says. "We had interest payments coming in. We had principal payments coming in. We had distributions from equity funds.
"CDFIs are incredible stories," she adds. "Their track records are fabulous. That was most of Casey's [social investment] portfolio, and the portfolio continues to perform."