Impact Investment Funds and Program Related Investments

Impact Investment Funds and Program Related Investments

Expert opinion

The U.S. Department Treasury has issued a private letter ruling[1] permitting a U.S. “private foundation” to treat investments in partnership formed outside of the United States  (the Impact Fund) as a program related investment (or PRI).  

The ruling is an amalgam of various concepts that will be familiar to Philanthropy Impact members.  The non-U.S. arm of a dual qualified charity (exempt from tax in both the United States and another country) invested in the Impact Fund.  Since the foreign arm of the dual qualified charity is a disregarded entity, from a U.S. perspective the investment is deemed to have been made by the U.S. arm of the foundation.  Consequently, the foreign. charity’s activities are regulated both by its home country and the United States.

Unlike mission investments, PRIs are made primarily for charitable purposes.  As a result, PRIs satisfy a portion of the foundation’s annual requirement to make distributions for “exempt” purposes.  Impact funds with PRI status is an added benefit for U.S. private foundations that seek to preserve their capital for the long term as well as to foundations that intend to front load their spending.[2] 

Program related investments are a subset of impact or mission related investments.  Program related investments are an exception to the prohibition against jeopardising investments contained in the U.S. private foundation excise tax rules.  

As a matter of U.S. law, it is not enough that the investment furthers the foundation’s charitable purposes.  An investment will not be a PRI unless “no significant purpose of the investment is the production of income or the appreciation of property”.  The PRI regulations elaborate on this concept stating,

    •   In making this determination, whether investors solely engaged in the investment for profit would be likely to make the investment on the same terms as the private foundation is a relevant factor.  “[T]he fact that an investment produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.”[3] 

The regulations confirm that equity investments in for-profit entities and investments that generate significant returns may qualify as PRIs.

The structure an impact investment fund that is a PRI will depend in large part on the identity of the investors.  The PRI concept is not relevant to individual investors.  However, it may be relevant to non-U.S. entities seeking investments (e,g., loans, equity investments, credit guarantees or some other form of participation) from U.S. private foundations. 

Creating a partnership or other fund that qualifies as a PRI for U.S. tax purposes requires a significant commitment on the part of the fund manager and the primary investors.  All of the documents governing the fund must be drafted so that they do not include any provisions that are inconsistent with the PRI rules. The fund’s investment guidelines must be drafted so that the fund is prohibited from engaging in transactions that would not qualify as PRIs while a U.S. private foundation is an investor.  Ideally, the investments made by the fund will be reviewed by a U.S. practitioner to confirm that they will qualify as program related investments under the U.S. private foundation excise tax rules.    

In some instances it may be advantageous for the charities (including private foundations) to provide risk capital to fund endeavours that further their charitable purposes.  The fund can layer the risk of receiving a return.  If charities receive a reduced or subordinated return on funds invested to further their charitable purposes, the fund may generate more interest among private investors because they will have a better chance of obtaining a more competitive return.

In U.S. tax parlance, the fund would then be a hybrid of impact investments.  Investments made by individuals would be “mission related investments” (investments that would be attractive regardless of an investor’s philanthropic inclinations that may also further charitable or philanthropic goals).[4] However, investments made by various charities (including U.S. private foundations) could be structured to qualify as program related obligations. 

While the ruling does not establish new law it provides welcome confirmation that investments in carefully structured foreign investment funds may be characterised as program related investments for purposes of the U.S. Treasury regulations.  


[1] Priv. Ltr. Rul. 202123004 (June 11, 2021).

[2]See Green, Michael, “To Spend or not to Spend”, Philanthropy Impact Magazine. Issue 4 Winter 2013 at p. 6.

[3] Treas. Reg. §53.5944-3(a)(2)(iii).

[4] See IRS Notice 2015-62 (2015-39 I.R.B. 411 (09/28/2015).