PRIs and Effective Intermediaries

Tuesday, June 30, 2015
by John W. Townsend, Vice President & Treasurer, Board of Trustees, Altman Foundation
During a recent panel discussion,  "Program Related Investment: the Promise and Pitfalls," John MacIntosh of SeaChange began his remarks with the observation:  “God doesn’t love intermediaries”, eliciting a chuckle from attendees since everybody is familiar with this popular prejudice, usually applied to “middlemen” who are commonly disparaged for making money while adding little value. As a trustee, head of the Finance Committee of the Altman Foundation, and someone who supported the concept at the outset, I’m confident that the recently-established New York Pooled PRI Fund ("NYPRI"), managed by SeaChange, an intermediary (!), promises to add a lot of value in PRI-making for us. And my confidence in this value was substantially strengthened by the panel discussion and the Q&A that followed.  It’s a type of vehicle that all medium size PRI-making or PRI-interested foundations should seriously consider
Before discussing the role of an intermediary in PRI making, let me introduce the Altman Foundation.  Altman has made grants almost exclusively in New York City for over 100 years.  We dedicate 5+% of our corpus ($250mm) to five areas:  health care, the arts, education, strengthening  communities through better housing, employment opportunity, and well-maintained parks, and services to non-profits -- with particular emphasis on enhancing access for underserved populations to NYC’s broader opportunity, whether it be through health care access for people lacking health insurance, access to NYC’s rich cultural menu, or college readiness for academically disadvantaged backgrounds.  Since our grant making in dollar terms is dwarfed by the need in the City, we must find a way to gain extra leverage from our endowment. PRIs are one of several tools we have tried to employ.   
Since 2006, we have made 7, totaling $4.25mm to non-profits, ranging from Common Ground to the Fund for the City of New York.  Frankly, 9 years into the program, I thought by this time we would have been able to have done more.  While the ones we’ve done have been successful (achieving important mission-related objectives and being repaid), their role in our overall mission has been fairly minimal.  So when SeaChange approached us last year about combining resources with a few other like-minded foundations by centralizing activities in one intermediary, we were eager to participate.
SeaChange is a non-profit merchant bank in NYC, founded in 2007. The Altman Foundation knows SeaChange well having worked together for several years as participants in the New York Merger, Acquisition and Collaboration Fund -- a grant making fund managed by SeaChange to encourage and support mergers, acquisitions and the like between NYC nonprofits.  SeaChange has also been active as a lender to nonprofits since 2013 through its management of the Contact Fund -- a loan fund which sources its capital from about 60 wealthy individuals. SeaChange launched NYPRI in the belief that a fund with the right structure could help narrow the gap between many foundations’ stated interest in making PRIs and the PRIs actually made. With the  assistance of a top-notch New York law firm, SeaChange was able to structure NYPRI as a “club fund” which pools PRI resources, centralizes deal making, and reduces costs, while still providing needed flexibility for the participating foundations.  NYPRI was officially launched in November 2014, and has already done one deal with another in the near-term pipeline.
What are the arguments for a foundation of our size dealing through an intermediary?
1. Focused deal sourcing - Our program officers, as expert and hard working as they are, are not focused on PRIs; nor should they be.  The vast majority of our grantees need grants – not loans.  PRIs may be appropriate for a distinct minority of local nonprofits, but given the complexity of identifying and carrying out PRI opportunities to completion, coupled with the workload at most foundations, it is far more efficient to delegate this role to NYPRI, and they’ve been out in the marketplace in an impressive way.  Although the publicity surrounding NYPRI’s launch did bring an ample amount of inquiry, hanging an “open for business” sign on your door doesn’t bring in much of it longer term.  You have to be pro-active, focused, imaginative, resourceful, creative financially, and regularly in touch.  
2. Imaginative structuring - Just as in the commercial sector, you have to be able to spot a challenge or opportunity, suggest perhaps a specially structured solution and negotiate something that meets the borrower’s needs.  NYPRI’s first deal was structured as a form of growth capital for a for-profit/non-profit venture.  It was far from cookie cutter.  
3. Pooled resources - Although in theory foundations can identify willing partners and pool their resources on a deal-by-deal basis, this is wildly impractical for both foundations and would-be borrowers.  Even though there are well-documented opt-out provisions in NYPRI, having each commit a certain amount to the fund at the outset establishes a good-faith pool whereby each of the participants has an interest in seeing it operate effectively.  NYPRI also acts in partnership with the Contact Fund, which is structured differently but is pursuing a lot of the same kinds of deals, giving us additional leverage.
4. Negotiating efficiency - Currently in process is a large affordable housing/mixed-use deal, involving multiple lenders and complex credit considerations.  Negotiating the loan agreement is not straightforward and requires not only negotiating skills but thorough knowledge of housing finance and its complexities.
5. Use of one law firm - I have had experience with PRIs involving multiple lenders and law firms, and despite the good intentions of all parties, the result can be a net drain on the resources of the non-profit sector. SeaChange has managed to engage the pro bono services of a top-notch law firm, so we are assured of timely, efficient, and cost-effective advice and service.
6. Work-out partner - Undoubtedly, some deals won’t work out too well in a sector that is plagued by all kinds of uncertainty.  NYPRI won’t be lending to or investing in investment grade credits that have ready access to the commercial banking sector.  And having an intermediary as a negotiating partner, and, to be truthful, a buffer, should make our lives much easier in the event of default.  Although over the years Altman has made grants to entities that have subsequently gone out of business, where grants are concerned there is usually very little to work out.  Loans are different.  We (and NYPRI) want to be repaid.  It does not advance the sector if we don’t treat PRIs as true investments.