A recent New York Times article on program-related investing highlighted the $10 million equity stake the Bill & Melinda Gates Foundation took in Liquidia Technologies. Some in the foundation world are concerned that the investment blurred the line between profit-making and charity. We and our Braintrust advisor Stephen Viederman say foundations should blur those lines—as long as they deploy their endowment assets when they do so. We would argue that foundations should use all of the tools available to them to meet their mission and purpose: grants, program-related investments and, most powerfully, their endowment assets.
November 28, 2011–An article that appeared on Black Friday in the New York Times business section reported on the growing use of what are known as program-related investments (PRIs). PRIs have lately been made with increasing frequency by foundations as an additional tool within their grant budget to advance their missions. PRIs are counted in the 5 percent grant payout required by the IRS for foundations to maintain their tax-exempt status. However, to qualify as a PRI under the strictest interpretations of IRS rules an investment should be made without consideration for its financial return and it should usually be expected to yield “below market rate” returns.
The Times article highlighted the Gates Foundation’s first equity PRI—a $10 million equity stake it took in Liquidia Technologies to help fund an initiative by the company to deliver vaccines to underserved populations. (A non-voting observer from the Gates Foundation will attend Liquidia board meetings, according to an article in Xconomy by Luke Timmerman.)
Some members of the foundation community, the Times reported, were concerned that PRIs made in for profit businesses may be “blurring the lines between profit-making businesses and charitable work.” Diana Aviv, chief executive of the Independent Sector, was quoted as saying: “Foundations are increasingly agnostic about how they achieve their goals. If their purpose is, say, to eliminate food deserts, they may see supporting a grocery store chain as the best way of doing that rather than funding a nonprofit program.”
The article went on to note that this “trend [concerned Aviva] at a time when government financing for nonprofits is declining and the charitable deduction is under fire. ‘It’s part of this slow erosion of nonprofit funding streams that threatens to undermine organizations that have been built over decades to meet high standards of public trust,’ [she] said.”
But perhaps one could argue that a foundation should indeed be in the business of blurring the line between profit-making businesses and its charitable work. The blurring should take place, however, not when a foundation makes grants or PRIs, but when it deploys its endowment assets.
“PRIs are great,” says Stephen Viederman, former president of the Jesse Smith Noyes Foundation. “But foundations have a spectrum of tools at their disposal to effect social change and grants and PRIs are only two of them.” Foundations also have another much more powerful tool, he maintains, they can also purposefully make investments out of their endowment assets and engage in shareholder activism to advance social change. Gates does not seem to be doing either.
Indeed, leading foundations like the F.B. Heron Foundation and Annie E. Casey Foundation have been making mission-related, market-rate investments using their endowment assets for years. The Noyes Foundation in the 1990s, under Viederman’s leadership, deployed a significant percentage of its endowment in mission-related investments including venture capital. Noyes publicly states that “in concert with the Foundation’s mission to promote a sustainable and just social and natural system, we seek to invest our endowment assets in companies that: provide commercial solutions to major social and environmental problems; and/or build corporate culture with concerns for environmental impact, equity and community. Viederman continues to advocate strongly that more foundations should adopt this investment approach.
An investment, says Viederman, should only be deemed a PRI in cases where without it an objective aligned with the foundation’s mission could not be realized. PRIs, Viederman asserts, should be seen as levers. They can enhance a foundation’s grant making mission, through their grant budget, but with different means, such as loan guarantees that will hopefully be returned.
What is interesting about the Gates Foundation’s PRI in question is that it appears to have been made into a company that was already able to attract investment capital. As Timmerman’s XConomy article reported: “The Gates Foundation certainly isn’t the first group to see potential in Liquidia’s work. The company already had significant venture backing, including a $25 million Series C venture round last April from Canaan Partners, Pappas Ventures, Morningside Venture Investments, New Enterprise Associates, PPD, and Firelake Capital.”
“Foundations exist for the broad public benefit which goes beyond just their particular mission,” Viederman concludes. “But most only extend their responsibility to serve the public benefit through their grant making [which includes their PRI portfolios] and not through the rest of their asset base. So I guess we could say, ‘hurray’ for these foundations who are looking at alternative investment tools to support their missions. But wouldn’t it be nice if they made those investments out of the asset base rather than the grant bucket, especially at a time when grant money is so scarce.”
So, rather than assign its Liquidia investment to its PRI portfolio, would it not have made more sense for the Gates Foundation to deploy some of its $36 billion endowment into what appears to be a venture capital investment? The Foundation could thus have been free both to advance its mission and make a profit along with its other venture equity partners in Liquidia. At the same time, it would have advanced another hugely important cause: that of mission-related investing.—Susan Arterian Chang