Investing in Unitus via a Donor Advised Fund
Unitus’s funds (Unitus) are for-profit impact funds seeking to deliver market-rate returns in concert with social impact. Some foundations are directly investing their corpus funds as mission-related investments (or “MRI”) in Unitus. There are relatively few IRS considerations on investing in this way. Others foundations are interested in making the investments from their annual 5% program allocations, as program related investments ( or “PRI”). Both are entirely practical. Unitus has taken commitments of many millions of dollars from leading large foundations and small family foundations over the past few years.
For background and useful references around both MRI and PRI investments, we first recommend reading this 2013 article from Forbes on the topic of foundation investments in for-profit mission-related entities. For a longer but still readable report on foundations and PRIs produced by Mission Investors Exchange, read here.
Since Unitus operations for-profit funds and each foundation has its own considerations in evaluating IRS regulations around PRI, we have taken two steps to facilitate these investments. First, we have a side letter which we can customize to address needs/concerns of each foundation. Eight leading foundations have already accepted our side letter + Private Placement Memorandum as adequate support for a PRI investment. And second, we have set up a Donor Advised Fund (DAF) mechanism with ImpactAssets to enable foundations to make an program grant to the non-profit DAF which is then invested in Unitus. We also highly recommend fiduciaries of private foundations read the recent IRS comments which clarify their intent with respect to PRI, linked below, as the DAF is not necessary for most foundations.
The Unitus/ImpactAssets DAF provides a simple method to establish an account for investing in Unitus with the DAF as the Limited Partner. The foundation counts the contribution as current-period program spend and has the opportunity to re-invest or re-donate the fund proceeds over time. This model can also be applied to DAFs run by other organizations that are willing to research and qualify Unitus.
Recent Treasury and IRS Comments on PRIs
In April 2012, the Federal Register published a commentary from the IRS and Treasury on PRI examples.
In this commentary, the 7th Paragraph below “Background” has a very helpful comment. We have emphasized the sentences most relevant to Unitus:
“The Treasury Department and the IRS are aware that the private foundation community would find it helpful if the regulations could include additional PRI examples that reflect current investment practices and illustrate certain principles, including that: (1) An activity conducted in a foreign country furthers a charitable purpose if the same activity would further a charitable purpose if conducted in the United States; (2) the charitable purposes served by a PRI are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas; (3) the recipients of PRIs need not be within a charitable class if they are the instruments for furthering a charitable purpose; (4) a potentially high rate of return does not automatically prevent an investment from qualifying as program-related; (5) PRIs can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations and for-profit organizations, and equity investments in for-profit organizations; (6) a credit enhancement arrangement may qualify as a PRI; and (7) a private foundation’s acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI.