Time to Unlock the Vaults

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Trusts and foundations are holding huge reserves of money in the form of stocks and shares or other profitable financial investment. Essentially, these are designed to produce the income the trusts give out as grants according to their objectives and guidelines. So, they exist in the minds of the trustees as two separate pots of money. There is, however, another way which could advance their objectives much faster and allow charities to thrive in these hard times.

This is by making programme related investments (PRI). Instead of investing their funds on the money market they could invest in the charities they seek to help on condition that these investments are not grants and will be paid back with interest. For example, this could replace a bank loan at a more favourable rate of interest or fund a micro-finance project that has showed promising returns or they could possibly invest in a new fundraising project e.g. to move a charities fundraising from techniques that are less and less productive into techniques that follow the money and raise large sums from high net worth individuals. The latter could currently give a much larger return than the money market’s dividends but there is some doubt about the legitimacy of investing in fundraising as a form of PRI.

PRI itself is not exactly new and a number of charities have already embarked down this road e.g. Esmee Fairbairn, Tudor Trust and City Parochial.

The Charity Commission in its advice to charities on PRI is quite clear this is acceptable, so long as the investment is made primarily to further the charities objectives and not just for the financial return. They do, however, exclude ‘permanent endowments’ from this use, as they are designed so that only the interest can be used for helping charities, and charities may need to take legal advice if they are unsure.

Unsurprisingly, the Charity Commission’s examples do not include investment in fundraising though this is probably gives a much higher ROI than any other, and again fundraising is ignored at a time when it should be centre stage giving rise to some uncertainty.

Social impact bonds (SIBs) are widely used, operate in the same way and are also encouraged by the Charity Commission:

“Investors in outcomes-based finance structures receive a financial return that is fully or partially linked to the social and/or environmental outcomes generated by the services delivered using the investment. A social impact bond is an example, and describes a contract which is typically between a public sector body and investors where the former commits to pay for an improved social outcome. Investor funds are used to pay for a range of interventions to improve the social outcome. The social and/or environmental outcomes must be in furtherance of the charity’s aims in order for this to be a PRI.”

Care must, however, be taken that this is not just a financial investment and again charities may need to take advice if they are not sure about this.

Doubt about the validity of using PRI to grow fundraising comes from the US, where the Inland Revenue Service (IRS) has recently issued new guidelines to encourage PRI. With 87,000 US Foundations holding $800 billion of foundation assets this is a very significant move. The IRS reminds them that PRI is valid even if the rate of return is less than conventional investments.

Unfortunately, their caveats appear to explicitly exclude fundraising, as they say:

“To qualify as a PRI, three key criteria must be met:

  • The investment’s primary purpose must be to advance the foundation’s charitable objectives.
  • Neither the production of income nor appreciation of property can be a significant purpose of the investment.
  • The funds cannot be used directly or indirectly to lobby for political purposes.”

It is, of course, the second of these criteria which forms the stumbling block. This may also be an important inhibitor to our Charity Commission which has not excluded this kind of investment, but whose advice otherwise runs parallel.

Let’s hope we can have clarity on this in the near future, as it could have a huge impact on the whole sector and our beneficiaries.