Monday, December 17, 2012

The Rapidly Blurring Boundaries Between Investments and Missions

Many charities, notably private foundations and educational institutions, rely on substantial endowments to help fund their missions.  These endowment funds are typically placed in a range of investments, the returns of which are used to support the organizations’ day-to-day operations. These formerly clear boundaries between investment activities and their subsequent funding of mission-based operations have been rapidly disappearing in recent years.

One can argue that this change began with pressures for charities to divest from investments deemed antithetical to their mission.  The blurring boundaries became most clear, however, with the expansion of program-related investments (including micro-lending), wherein an organization uses its resources to provide loans or other liquidity to those who cannot otherwise obtain it (or at least cannot obtain it at reasonable interest rates). Program-related investments have made it possible for organizations to invest their resources in ways that help achieve their mission while also obtaining modest (albeit below-market) returns.  As Stephanie Strom’s recent New York Times piece notes, this trend has taken the natural next step – investing in for-profit ventures that can actually earn substantial returns but are nonetheless capable of promoting an organization’s mission.

Given these trends, expect to see even further blurring of boundaries between investment activities of charities and their efforts to achieve their missions.  This will also raise the question of proper accounting.  As it stands now, investments, regardless of their ability to promote an organization’s mission, are treated solely as investments (an exception being that program-related investment cash outflows do count toward a private foundation’s minimum distribution requirements from the IRS’s standpoint).  As these investments become more pronounced, however, an effort to properly account for them will be in order.  For example, it can be argued that if an organization willingly accepts a below-market return in order to lend to or invest in activities beneficial to their mission, the foregone return is, itself, a program-related expense.  To date, no efforts have been made in this regard; but stay tuned, because they seem inevitable.

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