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nonprofitfinancefund.org ©2010 Nonprofit Finance Fund®
Nonprofit Finance Fund®
New Financing Structures for Nonprofits
March 20, 2012
Presented to: Grant Managers Network
Presented by:
Dione AlexanderVice President
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Foundation Perspective: Investment Tools
Endowment Investments
GrantsProgram Related
Investments
Financial Returns
Programmatic Returns
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The Bottom Lines:
1. Single Bottom Line=Mission Success: General Operating Support Program Grants In-kind support Scholarships Capital campaign funding
2. Double Bottom Line= 1+ return of principal and interest
3. Triple Bottom Line=2+ premium/dividend
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PRI vs. Grant
Grant– Affordability gap vs. financing gap– Extremely high risk level– Smaller $ amounts (<$100,000)– No repayment source, 100% negative return– Project or program funding vs. enterprise-level funding
Program-Related Investment (PRI) – True financing gap– Reasonable risk level– Larger $ amount– Obvious and reliable repayment source– Enterprise-level funding that addresses growth or change in business
model or revenue production
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Mission/Impact/Social Investing Continuum
Source: F.B. Heron Foundation Mission-Related Investing Continuum
Market-Rate Investments
Below-Market Rate Investments
Cas
h Pub
lic E
quity
Fixe
d In
com
e
Cas
h
Pri
vate
Equ
ity
Gu
aran
tees
Sen
ior
Loan
s
Sub
ordi
nate
dLo
ans
Gra
ntS
uppo
rt
Equ
ity
Lower Risk Higher Risk
Higher Risk Lower Risk
Program-Related Investment (PRI): Tax Code of 1969 defines as private foundation investment of any asset class in any type of organization for which:1. Primary purpose is to accomplish one or more of foundation’s charitable, religious, scientific, literary, educational, other exempt purposes.2. No significant purpose is production of income or appreciation of property.3. No purpose is to lobby or accomplish political purposes.
Mission-Related Investment (MRI): Refers to foundation investment in any asset class that has an expected market-rate return on a risk-adjusted basis
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Impact Investing Lessons
Past practices can constrain: Lack of investment discipline Search for excellence Over concentration on start-ups/new enterprises Must differentiate capital (grants, PRI, MDI)
Need both program and investment staff involvement
Distinctive opportunity and responsibility
Every investor has a different entry point
Every investor has different definition of mission-related
Education and capacity building for staff, partners
Link to program/mission critical
Not every idea/organization appropriate for an investment
Deals can take time to develop, unique skills and staffing may be required Grant support sometimes necessary to do deal
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Social Impact Bond (SIB)
What is it? A contract (not an actual bond) that:
Leverages private capital
Monetizes outcomes of social services
Realizes costs savings for government
Connects performance outcomes to financial return
Why does it matter? Depends who you ask: Exponentially increases the amount of capital that can
be brought to bear in the social sector Orients government away from outputs and towards
outcomes Focuses on prevention Places performance measurement and evaluation at
center Extends tax payer dollars Establishes a new asset class
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SIB Mechanics
How does it work?
An intermediary organization (Social Impact Bond-Issuing Organization or SIBIO) raises capital from investors to fund social services
Nonprofit service providers conduct programs An independent evaluator confirms whether pre-agreed social outcomes are met If pre-agreed outcomes are met, the government pays the SIBIO The SIBIO then pays investors a return, and retains a management fee If the pre-agreed outcomes are not met, the government does not pay the SIBIO, and
the investors receive no returnSource: McKinsey and Company
What are the benefits
Improve performance and lower costs. Model focuses on gov’t and social service providers achieving objectives and improving performance in a way that is transparent to taxpayers.
Accelerating adoption of new solutions. Since risk is shifted to private investors, gov’t has incentive to try promising new strategies including preventative services instead of funding same old approaches.
More rapid learning about what works. SIBs embed rigorous ongoing evaluations into service delivery, generating robust data which can inform policy decisions.
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Continuum of Structures: Some Examples
UK Model “Guaranty” Model
Govt Bond Model
Issuing Organization
• Delivery Agent• SIBIO
• SIBIO• Nonprofit Provider
• State or local government
Investor Type
• Philanthropic • Philanthropic• Impact investors
• Market investors• Impact investors
Risk Carry 100% risk to investors
Shared risk between all parties, depending on structure
• Majority of risk carried by provider
• Some govt risk
Drivers • Private equity structure• Repayment tied to outcomes
• Guaranty structure• % of guaranteed principal, plus outcome- driven repayments
• Broad market access
• Improved performance (providers and govt)
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Social Impact Bond Learning Hub(nffsib.org or payforsuccess.org)
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Low-profit Limited Liability Company (L3C)
The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.
A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation’s mission.
Sources: Nonprofit Law Blog, Attys. Takagi and Chan
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New Market Tax Credits (NMTC)
Enacted in 2000, the NMTC is administered by the US Treasury Department’s Community Development Financial Institution (CDFI) Fund, and is intended to bring private investments to low-income communities
NMTCs are allocated annually by the CDFI Fund through a competitive application process
Since the program’s inception, the CDFI Fund has awarded a total of $29.5 billion in tax credit authority to CDEs
Originally approved for five rounds (2003-2007), the program has received extensions through 2011
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NMTC Background: Structure
NFF New Markets Fund, LLCSub-CDE
0.01% Managing Member: NFF99.99% Member: Investment Fund
QALICB100% Member: Nonprofit Sponsor
Investment Fund100% Member: NMTC InvestorLeverage Lender NMTC Investor
NFF
Nonprofit Sponsor
Qualified Equity Investment(QEI)
Distributions
Qualified Low-Income Community Investments (QLICI)
Debt Service
Fees
NMTC
Equity
Loan
Debt Service
Lease Payments
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NMTC Background: The Credit
NMTC is claimed over seven years starting on the date the investment is made in the CDE and each subsequent anniversary
o 5.0 percent credit of the investment in Years 1 to 3; ando 6.0 percent credit in Years 4 to 7
39 percent credit (total) on investment (QEI) in the CDE
IRS Revenue Ruling 2003-20o A partnership/LLC can borrow non-recourse debt and
invest as equity into a CDEo 100 percent of the investment is recognized as a QEIo The ruling was made to aid in the deployment of NMTC in
response to the current tax credit investment community desire to “buy” tax credits more akin to the Low Income Housing Tax Credit
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NMTC Lessons Learned
Some things to consider………
Not all grants can be used in NMTC structures The unwinding of a transaction after compliance period is
based on an option; it cannot be certain True debt analysis It is not “free” money – the compliance period is 7 years
long and involves significant reporting and accounting requirements, and sometimes limitations on business
The transaction costs are going to be significant Get a consultant
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Creating Efficient Social Capital Markets
Innovation:Greater/DifferentReal/Perceived Risk:“But for” ~ “Impact”
SubsidyReturn
Scale
Guarantees / Credit Enhancement
Demand for Social Capital
Foundation / Government
Grants
Bank CRA Lending
Foundation PRIs
CDFIs / Intermediaries
DBL/TBL Equity Funds
Public Goods
Private Equity
Bond Market:: Affordable Housing, Charter Schools, SBA loans, health centers, CD loans
Private Equity Funds:
Clean Tech, Sustainable
Timber, LOHAS
Tax Credits
Supply of Social Capitalmeets risk-return demand ofPublic Capital Markets
Faith-Based
Investors
Credit Enhancement
Source: GPS Capital Partners
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