IRS Opens Door to More Impact Investing

Last week, the Treasury Department released guidance recognizing foundations may make investments with a wider range of return and risk expectations so long as they are not jeopardizing or compromising their charitable missions.  Proponents for the change expect the guidance to open the doors to more mission-related investments (MRIs), impact investing and innovative finance approaches to dealing with the growing array of societal and environmental issues confronting the globe. This should also create opportunities for new partnerships with forward-thinking venture development organizations and tech-based economic development initiatives. 

On the heels of the IRS guidance release, the Kresge Foundation, which has already supported a number of Michigan-based economic development initiatives, announced it expects to increase its impact investing portfolio to $350 million by 2020.  

Organizations had sought clarity from the IRS on the role and value MRIs and other social finance tools can play in a foundation’s asset management and investment strategy including the Mission Investors Exchange, the Council of Foundations (COF) and the Council of Michigan Foundations.  COF highlights one sentence in the guidance as an example of the opportunity presented:

For example, the guidance states that:

"A private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation's charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes."

Several of the leading U.S. venture development organizations already have relationships with one or more foundations as limited partners in their seed/equity funds. SSTI, through its Regional Innovation Acceleration Network (RIAN), sees greater collaboration between foundations and VDOs as a top priority toward reaching shared regional prosperity goals of creating high-quality economic opportunity through entrepreneurship, science, technology, and innovation. The new IRS guidance should help in this process.

In addition to direct investments, the guidance also may make it easier for more foundations to follow Kresge’s use of guarantees as an investment tool. According to the foundation’s press materials on the expanded $350 million commitment:  “A significant number of Kresge’s social investments will be made through guarantees, which are commitments from the foundation’s balance sheet that unlock capital from other investors. Kresge has intentionally sought to use guarantees – a tool that has had more limited use by other philanthropic investors – to mitigate risks that keep investors away.” 

The complete, four-page guidance is available on the IRS website at: http://www.irs.gov/pub/irs-drop/n-15-62.pdf.