As the global financial crisis puts a strain on all sectors—and adversely affects those most in need—we must look for opportunities to maximize the impact that our funds and partners can have in advancing our mission and core issues.
Through tools like low-interest loans, guaranties, and equity investments, the foundation will apply some of its resources to support companies, investment funds, financial institutions and other revenue-generating enterprises that further the foundation’s charitable purpose. Program-related investments (PRIs) can be important tools for the foundation to stimulate private-sector driven innovation, to encourage market-driven efficiencies, and to attract external capital to the foundation’s priority initiatives.
Q. What is the foundation’s new approach to Program-Related Investments?
A. We are working with a range of partners to use PRIs to deepen the impact of our work. We believe that investments are useful tools for situations in which our program strategies are best served by partnering with revenue-generating enterprises, such as companies, investment funds, financial institutions and NGOs. These entities may not be able to access investment capital from the private markets because the markets or entities that serve the poor may be perceived as too risky or costly to serve, or investors don’t have good information to assess the opportunities. By providing investment capital directly or by reducing risk to investors, we can help our partners access the capital they need to grow and demonstrate to the market that financially viable opportunities exist that serve the needs of poor or otherwise disadvantaged persons. We know we can’t solve all problems with these types of investments – grant-making remains critical for those sectors that have a low likelihood of generating sufficient revenues or be addressed by market forces. We have established an initial program with an envelope of $400 million to invest in a range of opportunities. The capital for PRI investments or guarantees will be provided by this special $400M pool which will be managed by the CFO’s office of the foundation. Out of this pool, we will invest in PRIs that directly and meaningfully contribute to the achievement of the foundation’s charitable purposes.
Q. What types of investments will the foundation do?
A. We will evaluate a full range of investment opportunities that could include:
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Debt instruments such as loans to NGOs, financial institutions or companies;
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Equity instruments investments in funds or purchases of shares in companies;
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Guaranty instruments such as bond back-stops or credit guaranties.
Any PRI opportunity must closely align with our program strategies, for example: increasing financing for agricultural smallholders in Africa, supporting charter school facilities expansion, or increasing investment in global health technologies.
Q. What criteria will the foundation use to evaluate investments?
A. We have only a limited pool of investment capital so we want to be careful how we use it. We will evaluate investments according to three core criteria:
Q. What types of organizations will be partners?
A. Because leveraging external capital is such an important part of this work, we are actively seeking partners to co-invest. These types of partners could include other private investors, or investors with a commitment to social goals. We could also partner with other philanthropies, government entities and public finance institutions, especially development finance institutions such as the World Bank.
Q. How will the foundation determine which organizations to invest in?
A. As with all our work, foundation staff will identify the right partners and organizations to receive program-related investments. All investments will be closely aligned with program strategies and will be managed by a team with specialized expertise in investment structuring in coordination with the program teams.
Q. How is MRI (mission-related investing) or SRI (Socially Responsible Investing) different from what the foundation is doing?
A. All of our PRIs will have as their primary purpose the achievement of specific charitable objectives that are aligned with the foundation’s mission, and no significant purpose of the investments will be to generate income or an appreciation of capital. In contrast, the primary purpose of Mission Related Investing and Socially Responsible Investing is to generate a return on capital, while investing in profitable ventures that also have a social purpose.
Q. Who will manage these funds – the foundation or the investment managers overseeing the endowment?
A. These funds will be managed by a specialized team working under the CFO of the foundation in coordination with the program and legal teams. Since we are a program driven organization, it’s critical to continue to work with program teams to ensure that all of our investments are aligned with program strategies.
Q. Is this a risky approach for the foundation?
A. Yes, there is some risk involved. We are positioned to take some risk and believe this is an important role for the sector—seeding new ideas, sharing lessons learned, and bringing new partners to table to advance some of the most promising innovations for the benefit of those most in need.
To ensure that we continue to advance our ambitious program goals, helping all people no matter where they live lead a healthy and productive life, the foundation must think creatively about how to extend the reach of our resources. Especially as the global financial crisis puts a strain on all sectors—and adversely affects those most in need—we must look for opportunities to maximize the impact that our funds and partners can have in advancing our mission and core issues.
Q. What happens if or when these investments earn a profit?
A. All of our PRIs will have as their primary purpose the achievement of specific charitable objectives that are aligned with the foundation’s mission, and no significant purpose of the investments will be to generate income or an appreciation of capital. In the case where an investment does earn a profit, the funds are returned to the foundation and utilized either for investment in additional PRIs or for traditional grant-making.
Q. What happens to any intellectual property (IP) associated with an investment?
A. As in our grant-making, the ownership of patents and other IP associated with an investment is retained by the company or entity that develops the IP. However, many of our PRIs include global access rights that ensure that promising technologies are developed for the purpose of serving the poor or saving lives, which may involve the creative management of IP rights that balances the foundation’s charitable objectives with the needs of our business partners.