Investment: How reserves can benefit the cause

Programme-related investment lets voluntary bodies reinvest reserves and pursue the organisation's charitable aims, writes Stuart Anderson.

In 1969 the US Congress came up with a definition of programme-related investment by charitable foundations. Thirty-one years later, the UK caught up. In the Chancellor's pre-Budget report of November 2000, Gordon Brown welcomed a number of recommendations relating to PRI made by the Social Investment Taskforce. Shortly afterwards, the Charity Commission clarified its guidelines on charitable investment. These would, it said, allow trustees to make investments from reserve funds for which the primary objective was not to maximise financial returns but to pursue the organisation's charitable objectives.

PRI has two advantages. The first is that it enables charities to make use of their reserve funds in a way that directly benefits those for whom the charity exists while also providing a modest return on investment.

The second is that the process of lending to or investing in beneficiaries, rather than simply making grants, enables charities' money to be 'recycled' within the voluntary sector economy and continue doing good - hence the title of the influential 2003 report The Magic Roundabout.

Programme-related investments can be made through loans, loan or rental guarantees, indemnities or the purchase of shares. Beneficiaries are generally smaller charities, social enterprises or micro-businesses located in communities that the investor is committed to developing. The vast majority of UK PRIs take the form of loans or guarantees.

Shares, of course, have the advantage of possible capital appreciation and dividend income, but they also carry significant risks. Not only might the enterprise in question go under, taking the charity's investment with it, but, even if it remains successful, shares in any private - as opposed to stock-market-traded - company are highly illiquid. Most voluntary sector organisations will want to think twice before effectively becoming venture capital providers to social enterprise. Venture capitalists get their money back by urging the company in which they invest to allow itself either to be acquired by a larger entity or to float on the stock exchange.

This is hardly an appropriate strategy for the average hostel or social landlord.

Indemnities and guarantees, meanwhile, are fairly straightforward. The investor simply earmarks a proportion of its reserves to underwrite a line of credit that would not otherwise be available to the beneficiary organisation. Help the Aged and Age Concern have taken this route by acting as guarantors for part of the Prime Loan Fund. This fund provides finance to out-of-work over-50s who wish to set up in business and therefore supports a key aim of both charities - enabling those aged 50 to 65 to become or remain economically independent.

The simplest way to carry out programme-related investments, though, is to make a loan to a community development finance institution. CDFIs exist to lend and invest in deprived areas and can trace their origins back to the 1970s and the foundation of organisations such as the Prince's Trust and Mercury Provident (now Triodos Bank). They make loans to social enterprises, micro-businesses and individuals who cannot gain access to mainstream finance. Sarah McGeehan, deputy chief executive of the Community Development Finance Association, the representative body for CDFIs, characterises their clients as "fundable but not bankable".

Investing through a CDFI has two big advantages. First, the risk management and due diligence are taken care of by professionals - all the charity needs to do is stump up the cash. Second, any investor willing to lock their money away in a CDFI for five years qualifies for generous tax relief.

Be they an individual, a blue-chip industrial conglomerate or a charity, any taxpayer making a commitment to maintain an investment in a CDFI for five years is entitled to 5 per cent tax relief on the sum of that investment, not just for the year in which it is made but for the following four years.

On top of this, the CDFI will return a modest sum to the investor as interest - usually 1 or 2 per cent annually. The capital invested is not guaranteed in the event of the project's failure.

The CDFI sector, according to McGeehan, is currently worth about £400m, divided among 57 institutions. "Almost half of this capacity has come in over the past two years," she says. "The sector is seeing steep growth, which we would expect to continue over the next five years."

For a charity to invest in a CDFI as a programme-related investment, however, the latter's objectives must tie in with the investor's charitable aims. McGeehan encourages potential investors looking for a suitable institution to contact the CDFA. "We will be happy to provide advice and facilitate introductions," she says.

It is possible to bypass CDFIs altogether and lend directly to another charity or social enterprise. However, this is a serious undertaking.

Malcolm Hayday, chief executive of Charity Bank, which provides finance both to CDFIs and individual charities, sets out the considerations involved in making any loan. "The process will vary from organisation to organisation and will reflect whether the PRI is an occasional transaction or an ongoing activity," he says. "You would need to carry out thorough due diligence, including site visits and analysis of financial information. Governance, strategic intent and human resources should also play a part in the decision."

The thorniest question of all is that of interest. Hayday is non-committal: "There is no single fair rate of interest - it will vary from organisation to organisation." Factors such as risk of default should play a part in setting this rate. For comparison, the typical rate charged by CDFIs to social enterprises last year was, according to McGeehan, 9.22 per cent.

Micro-businesses, meanwhile, paid 13 per cent and individuals, on average, 16-17 per cent.

The risk of default is an ever-present threat. The big question is, Hayday says, "will you enforce repayment?" For McGeehan the answer is an emphatic "yes", at least as far as CDFIs are concerned: "Often it does not make economic sense to pursue small debts through the courts, but CDFIs have to do so because they usually work in small communities and cannot afford to be seen as a soft touch. If word got out that bad debts were being written off, everyone would stop making their repayments. Then you are back in the situation where you are giving money away rather than recycling it in the community."

So an important question is not just whether the lending organisation can afford to lose the money it invests, but also whether it has the will and resources to pursue a borrower through the courts. This also raises potential reputational issues and could lead to contradictions in the pursuit of charitable goals.

What would happen if a large animal protection charity, for instance, were to face default on a loan made to a local animal shelter? It would obviously not fall within the charity's objectives to drive the shelter into bankruptcy in pursuit of its loan, because the impact on public and donor perception would be disastrous; but at the same time it would not want to risk all the other projects to which it had lent money deciding to default.

Done properly, though, the benefits of setting reserve funds to work rather than leaving them hanging around in the bank are clear - and not just for the investor, whose charitable purpose is furthered at no obvious cost other than a few percentage points of potential investment income.

The beneficiaries, too, gain - not only from access to finance that would otherwise be unavailable but also from the improved financial management required on their part to meet the terms of any loan.

Programme-related investment is, of course, never going to replace conventional investment altogether. In the US, where this form of investment is much better established, the largest percentage of reserves committed to PRI by any organisation is about 12 per cent. One of the early pioneers of PRI, the Ford Foundation, earmarks just 1.4 per cent of its assets for this purpose, though 1.4 per cent of $12bn (£6.5m) remains a healthy sum by anybody's standards.

That kind of investment is still many years away in the UK, but the almost-exponential growth of CDFIs, the enthusiasm of the Treasury for the project and the increasing demand from a proliferating voluntary and social enterprise sector mean that PRI, though not for everyone, is destined to remain with us for the long term.


In 2003 the Esmee Fairbairn Foundation, a large grant-making body, set up a £3m fund to provide loans to voluntary sector bodies. The fund was sourced not from the foundation's £28m grant-making budget but from its reserves. The fund, managed in conjunction with Charity Bank, is seen by the foundation as a pilot project and has been scheduled initially to run for three years.

Recipients of loans in 2004 included the Portsmouth Credit Savers Union and the Centre for Accessible Environments. These projects chime with the foundation's grant-making priorities, which focus on arts and heritage, education, the environment and social change. However, the fund has so far disbursed just six loans, totalling £575,000.

"The programme has advanced more slowly than expected," admits James Wragg (pictured), policy and communications manager at Esmee Fairbairn.

"In part this is a comment on the loan-readiness of voluntary organisations; in part it reflects the need to build the foundation's own learning at both trustee and staff levels."

This is not Esmee Fairbairn's first foray into loan finance: in 2001 its trustees agreed a £200,000 loan to a CDFI, the Aston Reinvestment Trust. Despite the slow progress of the current programme, Wragg remains positive about PRI: "In practical terms it should make Esmee Fairbairn's resources go further as they are recycled over time. As organisations receive and repay loans it is envisaged they will develop greater financial and management skills and the track record to move into mainstream borrowing."


The majority of published sources on PRI come from the US. A selection of these include:

- Baxter, Christine I: Program-Related Investments: A Technical Manual for Foundations, New York, John Wiley & Sons, 1999.

- Ford Foundation: Investing for Social Gain: Reflections on Two Decades of Program-Related Investments, New York, Ford Foundation, 1991.

- Smith, Craig: 'The Latest Cause: Small Business', Corporate Philanthropy Report, vol. 7, March 1992. A comprehensive bibliography can be found on the web by searching the database at for "program-related investment".

A number of more recent UK-based reports and resources can also be found on the internet. These include:

- The Magic Roundabout - How Charities Can Make Their Money Go Further. This report can be found at under "publications".

- The CDFA website provides links to many resources. It can be found at

Other sites providing background information include:, and

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