Paving The New Way
But if PRI-backed institutions proved their mettle by weathering the storm and maintaining a modicum of access to capital, the financial crisis has also reinforced the value of having a tool like a PRI available when the market seizes up.
"The financial crisis created a few challenges, and PRIs were the tools we turned to," says Debra Schwartz, director of program-related investments at the MacArthur Foundation.
Even before the crisis, MacArthur was developing a linked-deposit product with MB Financial Bank, a small community-minded bank in Chicago, that would allow unbanked arts organizations such as theater companies with cash flow problems to access capital. The idea was that a deposit by MacArthur would serve as a reserve the bank could draw on if there was a loss on the loan. The bank, in turn, was responsible for the underwriting, origination, and servicing of the loan, as well as the first 5% loss.
But then the financial crisis hit, and the banks pulled back on their lines of credit with very strong arts organizations that already had banking relationships.
"The program ended up being a lifeline in a much broader way than we imagined," says Schwartz, who says MacArthur expanded the program to accommodate the demand. She points out that the question is how to keep capital flowing where it needs to go at times when it's hard for even plain vanilla transactions to happen. "And that's where the value of PRIs really shines," she says, "because we can take outsize risks."
According to Schwartz, people focus on PRIs as instruments with below-market returns. But they are really about above-average risk.
"And we are willing to [take those risks] because we do it in areas where we feel we understand risks perhaps a little differently," she says. "We are not saying that everybody should do this. But we are committed to using our risk-taking ability and putting it out there to keep expanding opportunities for everybody else."
PRIs For Maximum Social Impact
Will PRIs move foundations away from serving the very, very poor? Certain nonprofits, after all, fear that the commercialization of the third sector will cause it to forget its roots in charity.
But experienced PRI makers argue that the opposite is true because these "soft PRI dollars" (usually below-market rate, higher risk on a risk-adjusted basis and/or "patient" up to as much as 25 years) enable projects to leverage the big bucks from banks, insurance companies and pension funds-and thus stretch scarce grant/PRI resources to solve problems at scale.
San Francisco-based Low Income Investment Fund (Liif) President and CEO Nancy Andrews explained how this works at a 2006 PRI Makers network (now Mission Investors Exchange) conference.