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 Alexander Vice President

1 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 1 Foundation Perspective: Investment Tools Endowment Investments Grants Program Related Investments Financial Returns Programmatic Returns

2 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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

3 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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 3

4 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® Mission/Impact/Social Investing Continuum Source: F.B. Heron Foundation Mission-Related Investing Continuum Market-Rate Investments Below-Market Rate Investments Cash Public Equity Fixed Income Cash Private Equity Guarantees Senior Loans Subordinated Loans Grant Support Equity 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

5 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 5 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

6 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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

7 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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 return Source: 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.

8 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® Continuum of Structures: Some Examples UK Model“Guaranty” Model Govt Bond Model Issuing Organization Delivery Agent SIBIO Nonprofit Provider State or local government Investor Type 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)

9 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® Social Impact Bond Learning Hub (nffsib.org or payforsuccess.org)

10 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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

11 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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 ( ), the program has received extensions through 2011

12 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® NMTC Background: Structure NFF New Markets Fund, LLC Sub-CDE 0.01% Managing Member: NFF 99.99% Member: Investment Fund QALICB 100% Member: Nonprofit Sponsor Investment Fund 100% Member: NMTC Investor Leverage LenderNMTC 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

13 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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; and o 6.0 percent credit in Years 4 to 7 39 percent credit (total) on investment (QEI) in the CDE IRS Revenue Ruling o A partnership/LLC can borrow non-recourse debt and invest as equity into a CDE o 100 percent of the investment is recognized as a QEI o 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

14 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® 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

15 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® Creating Efficient Social Capital Markets Innovation: Greater/Different Real/Perceived Risk: “But for” ~ “Impact” Subsidy Return 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 Capital meets risk-return demand of Public Capital Markets Faith- Based Investors Credit Enhancement Source: GPS Capital Partners

16 nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ® Learn Morenonprofitfinancefund.org Twittertwitter.com/nff_news Facebookfacebook.com/nonprofitfinancefund Our Blogphilanthropy.com/blogs/money-and-mission Sign Upnonprofitfinancefund.org/sign-up RSSnonprofitfinancefund.org/news/feed Get in Touch! Dione Alexander, Vice President ext. 12 nonprofitfinancefund.org Thank You! To Stay Connected… 16