Gates Foundation explores making loans, investments

The Bill & Melinda Gates Foundation changed the rules of philanthropy with the value of its enormous assets. Now it's breaking new ground with the way it uses them.

The financial crisis prompted some new thinking inside the world's largest private charity. Forced to do more with less, Chief Financial Officer Alexander Friedman came up with an unusual plan to use $400 million — not to give away but to lend and invest.

The former investment banker now hopes other foundations will do the same, putting more of the $600 billion that sits in U.S. foundation endowments to work solving problems.

"What we're doing here is using a set of relatively new instruments for foundations that are tried and true in the private sector," Friedman said.

Gates Foundation program teams will be able to tap into the resources of the $30 billion endowment to help achieve their goals, he said. The $400 million set aside for program-related investment can be used for loans, loan guarantees and equity investments.

The Gates Foundation has made four investments so far. A range of new deals is in the works, including charter-school expansion, agricultural financing for small farmers in Africa, and investment in global health technologies, Friedman said.

Program-related investments, or PRIs, are meant to further the charitable mission of a nonprofit, not to make money. They will be managed by Friedman separately from the rest of the endowment, which is handled by outside investment managers.

One of the deals would help a group of nonprofits raise funds by issuing bonds to support the building of charter schools, he said. The foundation is looking at using its assets to guarantee a portion of the potential risk.

Another way the funds could be used is to guarantee loans needed by ministries of health in developing countries to bridge a gap in aid, especially in the case of a health emergency.

Friedman said the credit crunch has made it harder for some of the foundation's partners to get access to capital markets and to borrow money from banks.

After the stock market crashed and the Gates Foundation endowment lost 20 percent of its value, the time was right to re-evaluate the foundation's financial strategy, he said. "We wanted to be as rigorous as we could to help the organizations we care about.

"Business folks at the foundation who come with experience using these tools looked at what foundations traditionally do and asked: Is there a different way to do it?"

They also sought advice from the Rockefeller Foundation, which had more experience with PRIs.

The Gates Foundation will look to partner with venture-capital firms for joint investments in global health, Friedman said, using its dollars to "provide a critical tipping point" for private companies to invest.

Kristi Heim: 206-464-2718 or kheim@seattletimes.com