Power of Partnerships: Program Related Investments November 2, 2017 Edna Garrett, Bill & Melinda Gates Foundation Ken Miller, Bill & Melinda Gates Foundation Seattle, Washington
Program Related Investments • The IRS defines PRIs as investments made by private foundations primarily to accomplish a defined charitable purpose (not to generate a financial return) • Additional tools, beyond traditional grants, that organizations can use to further programmatic goals • Foundation uses PRIs to stimulate innovation, encourage efficiencies and attract external capital, expertise and resources to priority charitable initiatives
Investment Continuum
Typical Kinds of Foundation PRIs DIRECT EQUITY FUND LOANS GUARANTIES INVESTMENTS INVESTMENTS Backstops on loans; Low-interest loans Investments to Investments in volume guaranties; purchase shares funds managed other guaranties of companies by external fund managers CONFIDENTIAL 4
History of Foundation’s PRI Efforts 2 year PRI pilot PRIs become a PRI risk envelope launched with a mainstream tool with expanded to $400M risk envelope $1B risk envelope $1.5B Dec 2010 1 st equity April 2013 PRI 1 st public company Aug 2015 Feb 2014 1 st royalty- 1 st direct PRI Sept 2010 based PRI international 1 st volume Nov 2013 investment 1 st buy down guarantee 2016 2013 2014 2015 2009 2010 2011 2012 > April 2011 May 2013 Dec 2015 10 th PRI closed 30 th PRI closed 50 th PRI closed June 2009 Sept 2012 1 st PRI closed by PRI 20 th PRI closed June 2015 40 th PRI closed team
Examples of Criteria to Use When Making a PRI 1. PROGRAMMATIC IMPACT þ Strong alignment with our program goals and charitable objectives. 2. LEVERAGE OF EXTERNAL CAPITAL þ Will the investment draw in external capital to support charitable purposes? 3. SCALABLE AND SUSTAINABLE SOLUTIONS þ A market solution that is rational and can scale sustainably. 4. PASSES THE “BUT FOR” TEST þ Project would not happen without programmatic/charitable investment or it would have lower programmatic impact. 5. APPROPRIATE LEVEL OF SUBSIDY (PRIVATE BENEFIT) þ The level of subsidy is justified by the excepted programmatic impact. 6. WITHIN PORTFOLIO LIMITS þ Organization’s overall PRI portfolio is not overexposed to any one sector, geography or investment type. 7. ACCEPTABLE PORTFOLIO MANAGEMENT BURDEN þ The organization has the capacity to appropriately manage the investment going forward.
Overview of Legal Aspects of PRIs • Summary of PRI Requirements • Jeopardizing Investments • PRI Exception • Primary Exempt Purpose • No Significant Purpose is Income or Appreciation • No Political Purpose • Key Terms of the PRI Documentation
Jeopardizing Investments Investments by a private foundation that “jeopardize the • carrying out of any of its exempt purposes” may subject the foundation and its managers to punitive excise taxes. IRC Section 4944.
PRI Exception PRIs are investments that meet the following three • criteria: 1. The primary purpose is to accomplish one or more of the purposes described in section 170(c)(2)(B) (e.g., the charitable purposes of the organization); 2. No significant purpose of the investment is the production of income or the appreciation of property; and 3. No purpose of the investment is to accomplish one or more of the purposes described in section 170(c)(2)(D) (e.g., support lobbying or electioneering). IRC Section 4944(c); Treas. Reg. § 53.4944-3(a)
Primary Exempt Purpose Investment shall be considered as made primarily to • accomplish one or more of the purposes described in section 170(c)(2)(B) if it: significantly furthers the accomplishment of the private • foundation’s exempt activities and if the investment would not have been made but for such • relationship between the investment and the accomplishment of the foundation’s exempt activities.” Treas. Reg. § 53.4944- 3(a)(2)(i)
PRIs and Global Access • Foundation tool for meeting programmatic requirements is the use of Global Access • Global Access requires that: the knowledge and information (e.g., research, data) gained from an • investment be promptly and broadly disseminated, and • the Funded Developments (e.g., vaccines, educational software) be made available and accessible at an affordable price to the foundation’s intended beneficiaries.
No Significant Purpose is Income or Appreciation No significant purpose of a PRI is the production of income or the appreciation of property. IRC Section 4944(c); Treas. Reg. § 53.4944-3(a)(1)(ii) “In determining whether a significant purpose of an investment is • the production of income or the appreciation of property, it shall be relevant whether investors solely engaged in the investment for profit would be likely to make the investment on the same terms as the private foundation . However, the fact that an investment produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.” Treas. Reg. § 53.4944-3(a)(2)(iii)
No Political Purpose “No purpose of the investment is to accomplish one or more of the purposes described in section 170(c)(2)(D).” Treas. Reg. § 53.4944-3(a)(1)(iii) • “attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” IRC Section 170(c)(2)(D)
PRI Documentation • The primary purpose of the investment is to accomplish one or more charitable purposes Statement of the purpose of the investment • Restriction on use of proceeds for specified purposes • • Requirement to repay any funds not used for specified purposes or upon a charitability default Special equity rights: withdrawal right, redemption, permitted transfer • Obligation to repay loan • • No significant purpose of the investment is the production of income or the appreciation of property • Consider actual economic terms • Consider facts regarding efforts to find financing from conventional market sources; representation regarding attempts/ability to secure financing on comparable terms through conventional sources
PRI Documentation (cont’d) • No lobbying/political activities Prohibition on use of funds for prohibited purposes • • Expenditure responsibility is typically required and requirements are incorporated in transaction documents (e.g., pre-investment inquiry, certain terms in written agreement, and reporting) Treas. Reg. § 53.4945- 5(b)
PRI Diligence • Traditional Transactional Due Diligence • PRI-Specific Due Diligence • Restrictions on Payments • Public Company Investments
Examples
Charter School Growth Fund 2. PROGRAM STRATEGY 1. CHALLENGE The foundation seeks to increase the number of academically strong Academically strong charter schools face substantial obstacles in seats in charter networks that serve students of color and low- obtaining affordable commercial financing for facilities: income populations Charter schools receive on average 80% of student funding that • Build capacity by leveraging other funding sources, both public and • traditional schools in the same district receive private Charter schools typically have to finance their own facilities • Increase the number of students graduating from high school • • Emerging operators with high potential but limited track record college-ready feel this challenge even more acutely 4. INVESTMENT 3. PARTNER Low-interest loan reinvestment Charter School Growth Fund Non-profit organization focused on supporting high-performing Date: October 2016 charter management organizations Foundation focus: Provide high-performing and high-potential Co-Investors: Walton Family Foundation, Schusterman Foundation and charter school operators with facility financing Harry Bradley Foundation Associated Funding: Operating grant
Intarcia Therapeutics 2. PROGRAM STRATEGY 1. CHALLENGE The foundation’s HIV strategy seeks to fund a long acting HIV ARV- There is a need for drug delivery solutions that address diseases based therapy that would be affordable and cost-effective for use to that require chronic drug dosing, such as with HIV antiretroviral prevent HIV infection in developing countries. drugs (ARV). This is a particular challenge for ARVs used prophylactically to prevent HIV infection upon exposure. The current option of daily pill administration is challenged by the requirement for a high-level of compliance. 4. INVESTMENT 3. PARTNER $50M Series EE Equity investment (second round) Intarcia Therapeutics, Inc. For-profit company focused on focused on developing an implantable Date: December 2016 drug delivery technology that addresses long-term drug dosing challenges inherent in the treatment of chronic diseases, such as diabetes and obesity. Co-Investors: Yes Foundation focus: Associated Funding: Project support grant D eliver a low-cost, long-acting implantable solution for HIV ARV-based prophylactic drug regimens as an alternative to daily pills, thereby addressing issues with compliance for people most in need.
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