Power of Partnerships: Program Related Investments November 2, 2017 - - PowerPoint PPT Presentation

Power of Partnerships: Program Related Investments

Edna Garrett, Bill & Melinda Gates Foundation Ken Miller, Bill & Melinda Gates Foundation November 2, 2017 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

CONFIDENTIAL 4

GUARANTIES LOANS DIRECT EQUITY INVESTMENTS FUND INVESTMENTS

Investments to purchase shares

• f companies

Investments in funds managed by external fund managers Low-interest loans Backstops on loans; volume guaranties;

• ther guaranties

Typical Kinds of Foundation PRIs

History of Foundation’s PRI Efforts

2009 2010 2011

2 year PRI pilot launched with a $400M risk envelope PRIs become a mainstream tool with $1B risk envelope June 2009 1st PRI closed by PRI team April 2011 10th PRI closed

2012 2013

April 2013 1st public company PRI

>

Sept 2012 20th PRI closed

Sept 2010 1st volume guarantee Dec 2010 1st equity PRI

2014 2015

PRI risk envelope expanded to $1.5B

Feb 2014 1st direct international investment

May 2013 30th PRI closed June 2015 40th PRI closed Dec 2015 50th PRI closed

2016

Aug 2015 1st royalty- based PRI Nov 2013 1st buy down

Examples of Criteria to Use When Making a PRI

• 1. PROGRAMMATIC IMPACT

Strong alignment with our program goals and charitable objectives.

• 4. PASSES THE “BUT FOR” TEST

Project would not happen without programmatic/charitable investment or it would have lower programmatic impact.

• 2. LEVERAGE OF EXTERNAL CAPITAL

Will the investment draw in external capital to support charitable purposes?

• 5. APPROPRIATE LEVEL OF SUBSIDY (PRIVATE BENEFIT)

The level of subsidy is justified by the excepted programmatic impact.

• 6. WITHIN PORTFOLIO LIMITS

Organization’s overall PRI portfolio is not overexposed to any one sector, geography or investment type.

• 3. SCALABLE AND SUSTAINABLE SOLUTIONS

A market solution that is rational and can scale sustainably.

• 7. ACCEPTABLE PORTFOLIO MANAGEMENT BURDEN

The organization has the capacity to appropriately manage the investment going forward.

þ þ þ þ þ þ þ

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
• f 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

• f 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

• ne 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

• 1. CHALLENGE

Academically strong charter schools face substantial obstacles in

• btaining affordable commercial financing for facilities:
• Charter schools receive on average 80% of student funding that

traditional schools in the same district receive

• Charter schools typically have to finance their own facilities
• Emerging operators with high potential but limited track record

feel this challenge even more acutely

• 2. PROGRAM STRATEGY

The foundation seeks to increase the number of academically strong seats in charter networks that serve students of color and low- income populations

• Build capacity by leveraging other funding sources, both public and

private

• Increase the number of students graduating from high school

college-ready

• 4. INVESTMENT

Low-interest loan reinvestment Date: October 2016 Co-Investors: Walton Family Foundation, Schusterman Foundation and Harry Bradley Foundation Associated Funding: Operating grant

• 3. PARTNER

Charter School Growth Fund Non-profit organization focused on supporting high-performing charter management organizations Foundation focus: Provide high-performing and high-potential charter school operators with facility financing

Intarcia Therapeutics

• 1. CHALLENGE

There is a need for drug delivery solutions that address diseases that require chronic drug dosing, such as with HIV antiretroviral 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.

• 2. PROGRAM STRATEGY

The foundation’s HIV strategy seeks to fund a long acting HIV ARV- based therapy that would be affordable and cost-effective for use to prevent HIV infection in developing countries.

• 4. INVESTMENT

$50M Series EE Equity investment (second round) Date: December 2016 Co-Investors: Yes Associated Funding: Project support grant

• 3. PARTNER

Intarcia Therapeutics, Inc. For-profit company focused on focused on developing an implantable drug delivery technology that addresses long-term drug dosing challenges inherent in the treatment of chronic diseases, such as diabetes and obesity. Foundation focus: Deliver 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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