Organizing for Impact Investment
In this chapter we consider various issues and actions to be taken in relation to designing and implementing an organizational framework for engaging in impact investing. As we have seen, there is a wide range of impact investors and each of them has their own unique set of investment and impact goals. In addition, institutions and other organizational forms which assume responsibility for investing the assets of others, such as foundations, endowments, and investment funds, have legal responsibilities as fiduciaries of the ultimate owners of the assets that are being invested. Each asset owner must address the fundamental questions raised in this chapter and establish a sufficient level of internal formality to build the team and other resources necessary to make good decisions about impact investing, even if those decisions are limited to the selection of intermediaries to actively manage the assets on a day-to-day basis. Intermediaries, such as fund managers, must also create an organizational framework for impact investing that can be explained to their prospective investors. This process will be illustrated later in the chapter when we discuss formation of impact investment funds. The opening sections generally assume that the organizational process is being carried out by a foundation.
Organizing should begin with visiting (or revisiting) a series of fundamental questions and issues relating to the investment and impact motivations and goals of the asset owner or fund manager.1 Simply put, this is the time to wrestle with the fundamental question of what is the owner or manager is looking to achieve by engaging in impact investing. A simple, yet comprehensive, framework for preparing to launch an impact investing programs recommended by Rockefeller Philanthropy Advisors (RPA) involves consideration of the following2:
• Why is the asset owner/manager interested in impact investing? Asset owners and fund managers may have several reasons for considering impact investing including a desire to have a social impact, an interest in integrating traditional investment focused on financial return with philanthropic activities, an interest in supporting the development of innovative technologies by social entrepreneurs looking to implement those technologies to address social problems, a belief that market forces can contribute to the pursuit of social good, an interest in using data and sophisticated data analysis to optimize potential impact, a belief that capital markets can expand the scope of impact beyond traditional philanthropic initiatives, and a recognition that impact investing can provide competitive financial returns.
• What type of changes is the asset owner/manager seeking to achieve through impact investing? Many investors begin with a list of broad categories such as poverty, health, climate change, and/or education, or look for opportunities to invest in funds, enterprises and projects that are focused on specific challenges (e.g., delivery of innovative educational technology), populations (e.g., women, children, elderly, people of color, or people with disabilities), locations (e.g., a specific neighborhood area) or institutions (e.g., advocacy organizations, hospitals, schools or charities). Another approach is to provide support for various parts of an ecosystem created for the development and deployment of innovative technologies to address a range of social problems.
• How does the asset owner/manager intend to assess progress toward achievement of the goals for impact investment and the desired changes from impact investing? Asset owners and fund managers must select appropriate tools for measuring the social impact of their investments alongside financial returns and have metrics and processes for measurement in place before each investment is made. When setting financial and impact targets, consideration must be given to the risks associated with achieving those targets. Financial risk is an intensely studied and well understood concept; however, the art and science of impact risk is still emerging and metrics are imprecise. For example, using impact investing to support the development of innovative technology not only involves risks that the development efforts will fail and/or the technology will not lead to the anticipated social outcomes, but also may lead to unintended consequences and negative effects.
• When does the asset owner/manager expect to realize the anticipated financial and impact returns on the impact investment? The scope of the challenges that are typically addressed by impact investing generally requires more patience on the part of investors than traditional investments. When the goal is to develop and implement innovative technologies to address a given social problem, the process may take several years and the efforts will likely run into unanticipated problems that will slow progress. While the end result will hopefully be substantial social impact and a strong financial return, it will take time and impact investors need to be comfortable with longer time horizons for both social change and financial return.
• Who does the asset owner/manager need to work with in order to achieve success and growth? While an asset owner or fund manager can have social impact acting alone, sustainable success and growth comes from working with others and asset owners and fund managers must decide on who they will look to for help in identifying and management impact investment opportunities. Asset owners and fund managers generally seek to put together a group of investment and professional (i.e., legal, tax, and accounting) advisors and build connections with peers in the investment and philanthropic communities who can share experiences and best practices (and offer chances to learn through co-investment, which is also a good way to allocate additional capital to worth projects in order to accelerate and broaden their impact). Asset owners and fund managers must also consider their appetite and resources for engaging with management of enterprises in which direct investments are made and, in the case of asset owners, the fund managers that they select as their intermediaries.
The answers to each of these questions are the inputs that the asset owner or fund manager needs to effectively prepare for engaging in impact investing and the answers should provide the asset owner or fund manager with a good idea of the level of readiness for actually getting started and the information that is necessary in order to prepare certain investment governance documents that can be used as guides for organizing impact investing activities and creating and implementing the investment strategy. The asset owner or fund manager should also establish a plan for achieving “investor readiness,” which RPA has described as requiring clearly defined implementation goals and strategies, including a relevant timeline; consensus with key stakeholders, such as family, board, staff, and others; relevant experience and expertise, internally from staff or externally from advisors; organizational momentum and capacity, such as processes and systems; and an intentional approach to building the portfolio and finding and managing impact investment opportunities.3
Investment Governance Documents
RPA recommends that impact investors formalize their theory of change and investment and impact goals by developing and implementing an impact investment statement (IIS) and an investment policy statement (IPS). RPA described the IIS is a guiding tool for both internal and external stakeholders, which provides clarity of mission, principles, and impact strategy and which generally includes all or most of the following elements: mission, vision, and values; views on fiduciary duty; definition and boundaries of impact investing; role of impact investing; impact investing approaches; theory of change; impact goals; impact tools and structures; product examples; and approach to impact evaluation. Suggested topics for the IPS include the roles and responsibilities of the board, the investment committee, and the ultimate asset owners; role of advisors, including level of discretion; overall investment goals and objectives; risk appetite; liquidity requirements; diversification goals; investment limitations, including specific assets and transactions; tax considerations, as applicable; asset allocation strategy; time horizon; new cash investment guidelines; and financial reporting. Investors may create two separate statements or integrate everything into a single document; however, the important point is that the investor establishes the guiding principles normally associated with an IIS to provide a point of reference for execution of the investment and impact strategy (i.e., design of investment products and portfolios) in line with the IPS topics.4
Implementation Goals and Building Consensus
Preparation of the IIS and IPS should be among the first implementation goals for any asset owner or fund manager; however, there are always going to be additional activities that need to be addressed early in the process in order to be sure that the entire program can be rolled out smoothly. Implementation goals will depend on the prior experiences of the asset owner or fund manager with impact investing, if any, available resources and the concerns of the key parties involved in making investing decisions. In order to know how to proceed, the asset owner or fund manager should analyze its existing investment portfolio and practices and survey the practices and activities of its peers. Among other things, this informs the asset owner or fund manager of the methods that have been used in the past to evaluate potential investment opportunities and often uncovers current investments that might not be consistent with the asset owner’s overall investment and impact objectives. An easy way to get comfortable with using the tools of impact investing is to apply them to an existing portfolio, such as by using screening methods or evaluating the investments using ESG integration methodologies.
Another important goal should be educating all of the relevant decision makers (e.g., board and investment committee members, family members and/or staff members) on the tools of impact investing and the potential benefits from implementing an impact investing strategy. In situations where there is a high level of skepticism, care should be taken to clearly demonstrate how impact investment tools can be used (e.g., applying basic screening tools to investment opportunities in a sector or thematic area that is already familiar to the organization) and select initial investments that have a higher probability of success with a reasonable level of risk and which are accompanied by investment and impact metrics that are easy to understand (e.g., a loan to a nonprofit that has already been vetted by the organization that can be tied to supporting a particular impact project that is readily understood by organizational leaders). The objective is to build a consensus among all of the organizational stakeholders that impact investing makes sense and is a path that should be pursued. This is not necessarily an easy task, since it often involves fundamental changes in organizational culture and requires that persons and groups learn new tools and concepts and set aside long-held views on investment objectives and the roles of various institutions in driving societal changes. In addition to creating the IIS and IPS, fundamental changes may be required in the organization’s overall mission statement and strategic plans.
RPA provided several strategies for approaching and engaging with various persons and groups within the organization in order to build a consensus around impact investing including helping them understand why the organization is embarking on a path of impact investing using approaches and language tailored to the specific audience; demonstrating how impact investing has an appropriate place among all the tools that should be deployed to achieve the organization’s mission; leveraging advocates, partners, stories, and data to support the case for impact investing; focusing on integrating and aligning financial and impact goals in the investment process; and selecting a diverse group of representatives from among all the stakeholders to assume a more formal role in impact investment decision making and oversight.5
The entire process takes time—organizations should generally expect that establishing an implementation plan that has support from throughout the organization will take anywhere from six to twelve months—and should be viewed as a continuous activity that will extend well into the future and include ongoing engagement with internal and external stakeholders, updating information and data regarding impact investing and education on new and emerging impact investing tools. During the initial implementation period, the organization can start slowly with modest impact investment activities such as a small program-related investment (PRI) that allows all the members of the team to gain experience in identifying and conducting due diligence on investment opportunities and establishing procedures for monitoring performance. Co-investing with private or corporate foundations pursuing a similar mission is also a good way to get started and demonstrate the potential of impact investing to the board of directors and members of the investment team.
Identifying and Selecting Investment Advisors
Many impact investors rely on one or more investment advisors to serve as intermediaries in the impact investing process. The number of advisors, and their respective roles, will depend on several factors, notably the skills and experiences of the impact investor’s internal team, which is discussed in more detail below, and the investor’s need to have advisors that can contribute to identifying and vetting impact investment opportunities. Investment advisors generally focus their activities on investment management and may or may not have “discretion” to actually make decisions about which impact investments should be purchased and/or sold on behalf of the investor. In addition, impact advisors may provide other services in areas such legal, tax and accounting.
While advisors can and should be able to help impact investors with setting their goals with respect to financial return and impact, investors should have a clear understanding of their goals before searching for an advisor. In addition, impact investors should develop a list of the services that they would expect to need from an advisor. Focusing on goals and services allows the impact investor to set their own unique set of selection criteria and narrow the search for potential candidates. While impact investors may seek recommendations from peers about investment advisors, the preferred approach is to do an open solicitation that reaches a broad range of advisors and provides the investor with an opportunity to identify important selection factors such as a specific thematic background and experience in advising on investments in certain types of projects or locations. Impact investors should also seek advisors with a track record of working successfully with clients that are similar in size and experience to the investor. The selection process generally includes preliminary screening followed by in-person interviews and review of formal proposals from a small group of finalists. RPA suggested that impact investors adhere to the following guiding principles when selecting their advisors6:
• Do they have expertise at the intersection of your impact and investment goals? And do they have specific examples of their experience and the role they played in desired strategies and investments?
• Do they have credentials to satisfy the work requirement and satisfy your key stakeholders?
• Do they have experience working with organizations and governance structures like yours? For example, do they operate on a discretionary or nondiscretionary basis?
• Can they speak your language and help you reach your specific goals? Do they exhibit values alignment with you on how they operate as an organization?
• Are they able to measure impact in line with your goals?
• What are their business strengths and weaknesses: customer service, reporting capabilities, ability and willingness to customize, fees, etc.?
As mentioned above, investment advisors should bring skills, experience, and contacts to the impact investor’s process that may not yet be available internally and the investor should expect that the advisor will assist in building internal capacity. However, impact investors should not rely completely on their advisors and should look for support from organizations of their peers that provide events, education, training, data, and information on “best practices” that investors can readily access and apply to their own situations. The goal of all this should be capacity building to support an organizational transition from traditional financial-focused investment and/or philanthropy at the two ends of a broad spectrum toward impact investing, which combines financing and social impact returns. Among other things, steps should be taken to build capacities in understanding the fiduciary duties associated with impact investing (as discussed below); impact principles, frameworks, and standards; relevant public policies and regulations, such as Opportunity Zones; forms of social enterprises, such as benefit corporations; and impact measurement and reporting.7
Building the Impact Investment Team
Impact investors, whether they are the actual asset owners or fund managers overseeing the assets of others, need to build and maintain an internal team with the requisite skills and experience for effective and successful impact investing. Some investors may already have teams in place that have been handling traditional financial investment and philanthropic activities as separate functions. In those situations, the challenge is to merge the functions without getting bogged down in conflicts based on different cultures and a lack of understanding between the two groups as to how they work and the tools that they are used to using. Different processes and systems will be needed and the two groups will need to settle on the best way to communicate and interact. RPA noted that the following questions should be asked as the integration process plays out8:
• How deeply does each party need/want to engage?
• If there is more than one team or person, how is the due diligence process being shared?
• What is the right frequency of meetings between investment-oriented and impact-oriented team members?
• How can more intentional communication be encouraged between investment and impact personnel?
• How do roles change from strategy through individual investment selection?
• How do roles change throughout the investment process from sourcing to due diligence, selection, monitoring, and exit?
Integration should work as time goes by and new hires chosen specifically for their specific credentials relating to impact investing join the mix and providing training to everyone working on the team.
The necessary expertise for impact investing can be placed into various roles (e.g., staff, advisors and consultants, or investment committee members) and the skills that will be required will depend on the impact investor’s own goals and interests. For example, impact investors should recruit personnel with experience deploying the specific impact investing tools that have been selected and the investor’s preferred asset classes, such as screening the ESG performance of publicly traded equities. In situations where the impact investor is unable to find someone to fill a particular role, a consultant or advisor can be brought in to cover that area until a good candidate for a permanent position can be identified. Regardless of the decisions made on internal staffing and the use of advisors and consultants, impact investors that contemplate making a wide range of investments over an extended period of time should serious consider forming an external investment advisory committee that includes experts in the impact investing process that also share a commitment to the investor’s specific mission and provide experience in identifying and vetting investment opportunities that are consistent with the investor’s IIS and IPS. The roles and responsibilities of investment advisory committee members should be carefully developed and clearly stated and may include prospecting for potential investment opportunities, providing training and technical support to internal staff members, reviewing proposed investments against the criterion laid out in the IIS and IPS and, where practical and appropriate, engaging with the managers of the funds or enterprises chosen to receive capital from the impact investor. The investment advisory committee is not the investment committee established by the IPS, instead its role is to advise and support the investment committee and the investor’s internal team and be available as a resource to other interested parties such as board members.9
While the organizational framework for impact investing needs to be designed and built to carry out a range of different functions, the most important output will obviously be the decisions that are made regarding the how the available funds will be invested. The RPA noted that the IPS should include clear guidelines on investment decision making and answer the following questions: who has the responsibility to vote on/approve issues, such as asset allocation or hiring an asset manager; who provides advice or formal recommendations; who reviews and provides oversight on the decision; who implements the decision and who is notified as an interested party?10 The RPA also suggested the following structure and instruments formalizing the relationships among board members, the investment committee and outside investment advisors in a situation in which discretion regarding investment decisions has been given to the advisor(s)11:
• Board of Directors: Responsible for developing and approving the IIS and IPS, with the IPS serving as the codification of the relationship between the board and the investment committee; setting the spending and payout policy including the allocation of the overall investment portfolio to impact investing and targets for financial return and impact outcomes; and establishing and managing the code of ethics
• Investment Committee: Responsible for the duties and activities described in the IPS including selection and management of external investment advisors pursuant to an investment/advisory services agreement; reviewing asset allocation; establishing rebalancing policies and ranges; organizing internal and external advisory committees; and regularly reporting to the board on portfolio performance
• External Investment Advisor(s): Reporting to the investment committee, external investment advisors are responsible for carry out their responsibilities under the investment/advisory services agreement including reviewing and recommending asset allocation, conducting fund manager due diligence, selecting, and monitoring investments, reporting on investment performance, rebalancing within asset allocation ranges, and monitoring IPS compliance
Processes and Systems
Implementing and executing an impact investment program requires that several important processes and systems be put in place, either by designing something completely new or making changes to existing practices. Among the areas that need to be considered by foundations moving toward impact investing are the following12:
• Governance: Processes for board and investment committee review and sign off on investments and tracking performance and reporting
• Legal: Professional review of any new impact investments and related documentation, particularly relevant for direct investing
• Administration: Grants personnel executing expenditure responsibility for any charitable investment, including relevant reporting
• Accounting: Finance teams tracking repayments and accounting for impact investments on financial statements and tax returns (e.g., Form 990-PF)
• Reporting: Developing and tracking combined impact and financial metrics and creating a process for reporting to key internal and external stakeholders
Legal Considerations
Persons and entities undertaking to manage the investment assets of another, either by making investment directly or providing advice for which the advisor is compensated, must conform to applicable legal and regulatory requirements, some of which are established by statute and others have been developed over long periods through judicial decisions and administrative rulings. Most importantly, managers and advisors must satisfy certain fiduciary duties to the asset owners, notably the prudent investment rules that require fiduciaries to invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. The fiduciary duties of asset managers and advisors are often broken down into two types of basic responsibilities13:
• Duty of Care: The duty of care includes, among other things, the duty to provide advice that is in the best interest of the client (i.e., the asset owner), the duty to seek best execution of a client’s transactions where the adviser is responsible for selecting broker-dealers to execute client trades, and the duty to provide advice and monitoring throughout the relationship. In general, the duty of care requires a manager or advisor to make a reasonable inquiry into its clients’ objectives and to have a reasonable belief that the advice it provides is in the best interest of the client based on those objectives.
• Duty of Loyalty: The duty of loyalty requires that managers and advisers not subordinate their clients’ interests to their own, which means that managers and advisers must make full and fair disclosure to their clients of all material facts relating to the management or advisory relationship, including the capacity in which the manager or adviser is acting with respect to the services provided, and eliminate or expose through disclosure all conflicts of interest that might incline the manager or advisor to render advice or take other actions that are not disinterested.
In addition, managers and advisers, as well as directors, trustees, and members of the investment committee, are subject to several ancillary fiduciary duties that apply to foundations and endowments under state statutes that are based on model laws such as the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which applies generally to all entities, and the Uniform Prudent Investor Act, which applies specifically to trusts, including a duty to investigate (i.e., make a reasonable effort to verify facts relevant to fund management and investment), a duty of obedience (i.e., perform duties with loyalty to the entity’s mission and obedience to nonprofit purposes), and duty to minimize costs by only incurring reasonable costs in the course of managing the assets.
Historically, the duties of care and loyalty have been applied almost exclusively in the context of traditional investment activities, which means financial prudence has generally been the paramount factor in any specific investment decision. However, foundations, endowments, and other nonprofits must be mindful of the duty of obedience in making investment decisions, with one court explaining that this duty “requires the director of a not-for-profit corporation to be faithful to the purposes and goals of the organization, since unlike business corporations, whose ultimate objective is to make money, nonprofit corporations are defined by their specific objectives.”14 In fact, the UPMIFA allows for mission considerations to be taken into account and for allocating assets to programs that have a mission purpose. In addition, the UPMIFA permits consideration of an asset’s special relationship or special value, if any, to the charitable purposes of the institution as part of any analysis of the prudence of a particular investment. RPA notes that fiduciary duties across the entire portfolio of a foundation or endowment can be satisfied through a combination of financial and impact prudence, which means that a portfolio can include a balanced allocation of assets (e.g., traditional financial investments from the endowment to preserve and grow principal) and distributions (e.g., PRIs at below market rate that meet charitable standards and/or grants that meet charitable standards, all of which are allowed under principles of impact prudence).15
Clearly fiduciary duties are fundamental concerns for all types of investors, especially foundations and other nonprofits, and it is important to create a formal framework within the overall impact investing process to avoid and/or manage conflicts of interest, both actual and perceived, and analyze compliance with the complex rules that apply to PRIs. Problems in this area can tarnish the investor’s image and lead to legal and regulatory issues with the IRS and states’ attorney general offices, which are typically charged with overseeing the activities of charitable organizations. It is important to create, approve, and enforce a robust conflicts of interest policy and to carefully document compliance with the policy with respect to each of the investments in the portfolio.
Building an Implementation Plan
Establishing goals, building a team of internal talent and external advisors, and understanding the relevant legal considerations are all important steps in creating the implementation plan for the impact investing program. The plan needs to be comprehensive on touch in each of the usual stages for a particular investment beginning with determining whether an opportunity fits within the investor’s financial and impact goals and then continue through due diligence, executing the investment, monitoring the performance of the investment, and, eventually, exiting the investment. Each of these stages will require a specific set of participants being their experiences and tools to the process. According to RPA and others, the key components of an implementation plan generally include clear goals and scope; a description of the overall roles for internal and external resources; a timeline with milestones or deliverables; budgets and schedules of other resources required for implementation of the plan; description of risks, assumptions, and contingencies relating to the goals and the execution of the plan itself; strategies for communications with stakeholders (including external communications on the investor’s website and in public presentations) and managing stakeholder expectations; a plan for effecting required changes in organizational culture to embed impact investing and its associated goals and mission; and a framework for documenting the entire investment process and preserving related records such as internal memorandums and minutes of the deliberations of the board of directors and investment committee.16
Formation and Management of Impact Investment Funds
The discussion above illustrates the process that foundations, endowments, and family offices might follow in organizing the activities necessary to pursue an impact investing strategy. One of the many choices that those asset owners must make is whether to place all or a portion of their assets in the hands of intermediaries including investment funds promoted and operated by managers promising experience and skills in identifying and managing impact investment opportunities. Investment fund managers need to address all of the same questions and issues confronting their prospective investors—what is their “theory of change,” what tools will they use to screen and select investments, do they have the right team members and what policies and procedures should be put in place to manage deal flow and measure performance—and must be prepared to demonstrate to those investors why they are an appropriate vehicle for them to realize their investment and impact goals.
There are many different categories of impact investment funds: hedge and mutual funds, which generally look to achieve market or premium returns on their investments with positive social or environmental impact as a secondary goal and follow either responsible impact investing (negative screening to identify and eliminate environmental, social, and governance (ESG) risks) or sustainable impact investing (positive screening to identify ESG opportunities) strategies, or private equity and venture capital funds, which usually focus on strategies based on thematic (targeting specific types of environmental or social issues) or “impact first” (prioritizing impact over financial returns) investing.17 Funds are available to appeal to the wide range of preferences among impact investors regarding the stage of development of their portfolio companies, the type of investment instrument, the size of their investment, the timing of their return on investment, and the manner in which they expect to exit the investment opportunity. For example, some investors prefer funds that focus on providing seed capital to assist startups in the initial stages of building the business, even before the time that the company seeks to raise larger amounts of capital in its first full venture capital financing. Other investors will have a somewhat lower tolerance for risk and will usually only be willing to participate in funds that make later-stage investments in companies that have already proven the viability of their business models and offer more favorable exit opportunities within a short- or medium-term investment horizon.
Private equity and venture capital funds focused on impact investing are typically organized as a limited partnership or a limited liability company (LLC). The investors in these funds are institutional investors, foundations, charities, endowments, and wealthy individuals who have contributed cash to the limited partnership or LLC for investment and management by managers with experience in working with small, emerging “high-risk” ventures with a business model that promises both traditional financial return and significant positive environmental and/or social impact.18 The diversity of the investor base for impact investment funds has expanded in recent years and most of the investors have incorporate environmental and social impact into their own formal set of internal investment guidelines. The funds are invested in 15–25 “portfolio companies,” assuming a fund size of about $200 million (the average size of an impact investment fund as of 2016), and the managers will typically review thousands of business plans. Funds may supply all of the capital required by a portfolio company for a specific round of investment or the fund managers may participate in co-investments into portfolio companies with other funds and/or strategic investors (using a special purpose vehicle) or form a joint venture with a portfolio company directly. If permitted under the terms of fund’s investment policies, the fund managers may also make direct loans or grants to portfolio companies, although equity investments are the primary focus.19
The funds are long-term businesses with a life expectancy of 10–12 years, and most of the investments are made during the first several years of the fund’s duration with the expectation that they will mature into an exit opportunity before the end of the term of fund.20 While the managers only contribute a nominal amount (e.g., 1 percent) to the funds, they receive a disproportionate allocation of the profits. For example, it is common for profits to be allocated 20 percent to the managers and 80 percent to the investors, thereby providing tremendous incentives to the managers to maximize the return from an investment in a company (profits also received preferred tax treatment as capital gains). Managers will also receive some form of management fee to cover salaries and other overhead expenses over the term of the fund. Assuming they are successful with their initial fund, the managers will usually operate more than one fund at a time.21
Limited partnerships and LLCs are used for impact investing funds to provide investors with certain tax benefits including avoidance of double taxation if the corporate form was used and to provide investors with limited liability with respect to the operations of the fund: the liability of the investors will be limited to the total amount of cash that they contribute to the fund. In exchange for limited liability, investors must surrender any rights to actively participate in the management of the fund; however, investors will have the right to vote on various fundamental matters relating to the fund and it is now commonplace for fund managers to form a limited partner advisory committee that includes key fund investors of the fund who have particular experience or whose organizations have social impact missions that are aligned with the fund’s investment guidelines. Committee members provide advice to the fund managers regarding investments and also address issues such as conflicts of interests involving the fund managers on behalf of all of the fund’s investors.22
While interest in impact investing has been growing steadily in recent years and information regarding impact investing has expanded, it is still a relatively new area and savvy investors will carefully scrutinize the experience and claims of fund managers relating to their capabilities to successfully identify and manage impact investments. One useful tool, developed for assessment of external hedge fund managers by investors but suitable for adaptation to all types of impact investment funds, is the due diligence questionnaire released by Principles for Responsible Investment (PRI) in 2017. The questionnaire includes the following questions to help investors identify fund managers that have the personnel, knowledge, and structure to incorporate ESG factors into their investment decision-making process23:
1. Policy
1.1 Does the investment manager have a policy addressing its approach to the incorporation of ESG factors within the investment process? If yes, please provide a copy of the policy and indicate the coverage of the policy by asset class, funds, strategy, and assets under management (AUM). If there is no policy, please explain why.
1.2 What is the investment manager’s rationale for adopting a policy to incorporate responsible investment into the investment decision-making process?
1.3 To which normative codes and initiatives is the investment manager a signatory or a voluntary adherent (e.g. the PRI, national stewardship codes, HFSB Hedge Fund Standards, CFA’s Asset Manager Code of Professional Conduct, AOI Hedge Fund Principles 2014)?
2. Governance
2.1 Please indicate the methods of investment manager internal oversight (e.g., oversight by investment committee, firm management, board of directors, etc.), and reporting of responsible investment incorporation across the investment manager’s organization.
2.2 Please describe how the investment manager has organized responsible investment responsibilities within its investment team(s) and indicate whether the investment manager employs responsible investment professionals.
2.3 Please explain what responsible investment training is provided by the investment manager to its employees.
2.4 Does the investment manager’s annual employee performance review or remuneration metrics reflect any component for the inclusion of responsible investment? If yes, please describe them. If not, please explain.
3. Investment Process
3.1 Please describe what ESG data, research, third-party consultants, resources, tools, and practices the investment manager uses. How are these incorporated into the investment and risk management process?
3.2 Have there been any changes to the investment manager’s responsible investment incorporation process over the past twelve months (e.g. additional resources, information sources)? If yes, please describe them. If not, please explain.
3.3 Please explain how active ownership practices, both voting and engagements, are integrated into investment decisions.
3.4 Please provide examples of where ESG risks and opportunities were incorporated into the investment manager’s investment decisions over the past twelve months.
4.1 Please describe what metrics (internal and/or external) the investment manager uses to measure its progress in incorporating responsible investment into the investment process.
4.2 Does the investment manager assess its fund’s exposure to climate risk and measure and monitor the carbon footprint of its investment portfolio? If yes, please explain the assessment process. If not, please explain why.
4.3 How often and in what format (e.g., meetings, written reports) does the investment manager report to its investors on ESG activities and portfolio ESG risks assessments? Please provide reporting examples.
Fund managers make their case to prospective impact investors in the various offering documents prepared when the managers begin to market their funds and then confirm their willing to meet the requirements imposed by investors in the fund’s limited partnership or operating agreement and in “side letters” that include additional commitments for all of the investors or just the investors identified therein. When preparing the offering documents, fund managers need to make some fundamental decisions relating to the various questions outlined above, such as what type of environmental and social impact they are attempting to achieve, the balance to be struck between financial and impact goals and the tools that will be used to measure and report on the impact of the fund’s portfolio.24 In addition, the fund managers need to be able to differentiate their proposed fund from the growing number of competitors in the marketplace using a compelling investment and impact thesis that explains the existing need in the marketplace that will be addressed by the fund; provides credible evidence regarding the existence and extent of the need; sets out the fund’s underlying theory of change; describes the proposed sectors of investment, deal size, and deal type; and demonstrates that the projected financial and impact returns are realistic.25 Answering these questions are essential to the success of the capital raising process, since surveys of investors conducted by the GIIN indicate that they are put off by fund managers who fail to demonstrate an understanding of the critical elements of fund structure and thoughtful consideration of terms, drivers of return, and opportunities to add value.26
There is no standard template for the offering documents that fund managers will use when soliciting capital from prospective investors; however, the overriding principle should be that the fund managers provide full and clear disclosure of all material facts that investors might reasonably consider when making their decisions. The offering documents should certainly describe the fund’s proposed investment program and processes including the fund’s specific impact theme(s), if any (e.g., affordable housing); the extent to which financial returns are the fund’s sole or secondary objective; how the fund managers expect to measure and report outcomes for each impact theme (e.g., increases in the supply of affordable housing in a specific geographic region in a specific time frame); the due diligence procedures that fund managers will conduct with respect to potential investments; and the plans of the fund managers relating to management of investments and ongoing engagement with the leaders of the social enterprises that are included in the fund’s investment portfolio. Specific requirements of investors regarding financial return and impact may be addressed in the offering documents and/or in the fund’s partnership or operating agreement and side letters with investors. Actual and potential conflicts of interest should also be discussed include a description of how the fund managers will resolve investors’ conflicting impact requirements and the circumstances under which the fund managers or their affiliates may provide services to portfolio companies. Finally, like any other offering documents, the materials for an impact fund must cover the material risks of investing in the fund including the possibility of lower financial returns, execution risks associated with the new and evolving business models used by the typical portfolio companies, difficulties in measuring impact, and the shortage of reasonable exit opportunities for impact investments since they may be less likely to have strong public or secondary markets.27
While prospective fund managers can often prepare eloquent disclosures including processes and promises for each of the issues outlined above, investors will nonetheless look through the words to evaluate the skills and experiences of the fund managers and the team members they will be recruiting to assist in executing the impact investing strategies. Just as the investors need to address the team formation issues outlined above, fund managers need to have access to people and organizations that understand the delicate balance between achieving financial returns and generating environmental or social impact. The fund managers will typically recruit to fill various roles relating to evaluating prospective deals, negotiating the terms of investment into portfolio companies and managing the performance of those companies over the entire period of the fund’s investment. The size of the team will depend on available resources and the anticipated number of deals that the fund will participate in over its life cycle, and it is common to create roles such as senior deal team leader, associate, and analyst. In addition, fund managers will often engage outside advisors and experts to provide specialized services for specific deals. When bringing people on to fill these roles, fund managers are advised to pay particular attention to skills that can be used to implement effective strategies and techniques for impact measurement and management.28
As for the fund managers themselves (i.e., the promoters of the fund who will be the executives of the general partner making the investment decisions and overseeing all of the team members), surveys indicate that prospective investors are looking for a diversity of skills at the top of the organization, especially a demonstrated ability to create and manage relationships with a diverse set of key fund stakeholders including investors, entrepreneurs, directors, and executives of portfolio companies and the managers of funds that might become co-investment partners. In addition, while a successful track record as a fund manager will obviously be an important plus when marketing a new fund, investors generally give equal weight to deal and operational experience, either as a direct investor or as an entrepreneur, since the key to success as a fund manager is the ability to select and manage investments and orchestrate exit strategies. While fund managers are expected to bring in specialists to handle detailed financial analysis and accounting, they should have experience in financial management and reporting since it will be relevant to their abilities to raise funds and deploy capital. Other fund manager traits that may be important for particular investors include expertise in the fund’s targeted domain and the local environment, business-building or entrepreneurial experience and demonstrated interest in and commitment to achieving social impact.
Another issue that is consistently cited as being very important to prospective investors is the ability of fund managers to credibly demonstrate that they can create a robust pipeline of investments that fit within the fund’s thesis in terms of sector, stage of company and size, since the ability of investors to achieve their financial and impact goals depends heavily on finding good deals and deploying capital quickly once a fund has closed.29 Experienced fund managers that may already be operating other funds will likely have a better sense of the pipeline because of their understanding of the needs of their current portfolio companies and their ongoing participation in the marketplace (i.e., they will already have a flow of business plans and other deal opportunities and the existing resources to vet them); however, managers starting up a new fund may have smaller networks and will obviously be focused on their own fundraising activities. Fund managers cannot commit to deals unless and until they have closed on their funds and the window for participating in a deal is often very narrow: companies, and other funds interested in supporting them, will not wait for fund managers to close their funds. Closing a fund usually takes a number of months and depending on the terms the fund managers will be expected to deploy most of the funds within three to five years of the final closing (a portion of the committed capital is typically reserved for follow-on investments in portfolio companies selected during the early years). In some cases, investors may commit to provide a specified amount of capital within three to four years of the fund closing but will not make those funds available until they are formally “called” by the fund managers in order to take advantage of deals that have progressed to the point where they are ready to close, thus preventing a situation where the capital sits in a money market account waiting for the fund managers to find deals.
According to guidance issued by the GIIN, fund managers looking to source deals need to both effectively market themselves and present their unique value proposition for potential investees and have a thoughtful strategy for identifying future investments (i.e., creating and maintaining an investment “pipeline”).30 Investors will scrutinize the business networks of the fund managers to assess whether they have an adequate presence in the ecosystem in which the fund proposes to operate. Among other things, fund managers should demonstrate that they have relationships with local business leaders, bankers, accountants, financial advisors, and attorneys. Fund managers should also have connections to incubators and accelerators that provide support for startups that might become suitable investment opportunities as they progress. Also important will be the ability to forge partnerships with other funds and different types of intermediaries in order to gain access to potential deals that they may have sourced and which are suitable for co-investing. The GIIN recommended that fund managers plan on spending about twelve months on sourcing a deal, starting with the time that initial contact is made with the promoters of the opportunity and then extending through due diligence and finally completing the necessary documentation to close the deal. In most cases, the fund managers will invest a significant amount of time investigating an opportunity only to find that it will not work out. The fund managers need to establish an internal database to track the fund’s pipeline and should analyze the data regularly to identify points in the process where improvements might be made.
In addition to describing their proposed process for generating a sufficient flow of potential investment opportunities, fund managers need to be able to tell prospective investors how they intend to select the companies that will be included in the fund’s investment portfolio. While investors in impact investment funds are obviously interested in potential financial returns, they need to understand how the fund managers will be evaluating and measuring the potential impact of the opportunities they are reviewing. The fund managers need to explain how impact data is collected and used to pre-screen investments, conduct due diligence and establish performance standards that can be incorporated into the terms of the investment documentation. The fund managers need to carefully document their deal selection process and formalize it so that all members of the team understand which questions need to be asked and the objective criteria that will eventually be applied to make an investment decision. A clear statement of the fund’s “theory of change” is important because each investment should align with the fund’s overall mission and impact goals. The fund managers should also be prepared to explain how they intend to use the fund’s investment committee and will need to take into account feedback from investors regarding the role of the committee in reviewing and selecting deals and allocating resources to due diligence and others required to manage the fund’s deal pipeline. In some cases, the investment committee does not get heavily involved until the parameters of a proposed transaction have been largely finalized and diligence has been completed. However, some investors prefer that the committee be brought into the process earlier and given an opportunity to compare competing opportunities that the fund managers might be considering at one time.
One issue that often gets ignored by prospective fund managers is the need for them to demonstrate to potential investors that the fund itself will be operated based on a sustainable business model that allows it to achieve its goals based on realistic assumptions, budgets, and timelines that have been developed before the fund is launched. In its guidance to fund managers, the GIIN emphasized the need for fund managers to be able to articulate a strategy for managing the key economic elements of the fund including management fees, carried interest, and capital deployment. Like any other business, fund managers need to have an economic model that takes into account the size of the fund, the type and size of investment that the fund proposes to make, projected gross returns to the fund and net returns to investors, cash flows, operating budget, and types of deal instruments that the fund will typically be using (which will influence the timing of cash flows and the risk associated with realizing the projected returns). Putting together an economic model means digging deeply into each of the elements mentioned above. For example, in order to determine the operating budget, fund managers need to determine the optimal staffing levels, which requires accurate projections about the number of prospective deals that will be evaluated over the course of the fund’s lifetime and the resources that will need to be allocated to each of them.
The requirements and expectations of the investors will be set forth in a comprehensive limited partnership or operating agreement and the length of such agreements has grown steadily as the years have gone by. A good deal of space in the agreement will be devoted to provisions that are driven by the tax treatment of the entity and its owners.31 The agreement will also cover the fund’s economics (i.e., time of capital contributions, allocations of profits including the general partner’s carried interest, distributions and claw backs, management fees and organizational and entity expenses); term and structure including extensions of the fund’s term and the creation and use of vehicles investing alongside the fund; duties of the fund managers and other “key persons”; fund governance (i.e., fiduciary duties, cross-fund investment, co-investment allocations, advisory committee rights and processes, valuation of portfolio investments, and independent audit requirements); and financial and impact disclosures (i.e., quarterly and annual reports on financial performance, portfolio companies, and progress against impact goals). The agreement will typically be supplemented by policies relating to specific issues such as conflicts of interest and ESG reporting. Investors making the largest commitment of capital to the fund may also be afforded special rights under “side letters” between them and the fund managers covering topics such the investor’s right to co-investment directly in opportunities identified by the fund managers.
When drafting the fund’s limited partnership or operating agreement, particular attention should be paid to defining the scope of the fund’s mission and ensuring that it includes impact-related requirements that are specific enough to facilitate meaningful measurement yet still provide the fund managers with flexibility to adjust their strategic decisions in response to changes in market conditions over the life of the fund.32 The terms of impact-oriented funds are often longer than traditional funds (e.g., twelve years as opposed to ten, with provision for up to three additional years at the option of the fund managers to bring the full length of the term to fifteen years) because impact investments require significantly longer periods to yield acceptable returns and a longer term supports a mindset of focusing on portfolio companies that will take longer to reach profitability because of their own social missions and business models. Some funds are actually structured as “evergreen funds,” which have been described as having “an indefinite lifetime in conjunction with redemption options for investors, e.g., allowing investors to opt-in or optout on an annual basis; allowing redemption following a formal notice process; or allowing redemption at will, with another impact investor or a foundation functioning as guarantor to the fund.”33 Impact-focused funds may also use different compensation structures for the fund managers, such as distinguishing between financial and impact performance in the “carried interest” provisions (e.g., fund managers may be eligible to receive up to the traditional 20 percent carried interest; however, 15 percent might be awarded based on financial performance, and 5 percent would be awarded based on agreed measures of impact performance among the portfolio companies). Certain impact investors may also be given preferences with respect to distributions.
The use of an advisory committee consisting of representatives of the fund’s investors is mentioned several times in this chapter and such a committee can serve a valuable role in providing the fund managers with access to professional investors with specialized expertise on topics central to the fund’s mission and goals. Advisory committee members should be called upon to weigh in on matters that are not within the core management functions of the fund managers—selecting the fund’s portfolio companies—but which are nonetheless essential for sound fund governance. Among other things, the advisory committee may be involved in review and resolution of conflicts of interest, audits of financial and impact performance and valuation of portfolio companies. The documentation for the fund will make it clear that the members of the advisory committee owe no fiduciary duties to the fund or any of its investors and that the reasonable fees and expenses of the committee will be borne by the fund.
Reports and other communications from the fund managers to the fund’s investors should also be addressed in detail in the fund documents. At a minimum, investors should expect to receive quarterly and annual reports, which include financial statements for the period covered by the report and a narrative discussion of the progress of each of the fund’s portfolio companies along with credible data on valuation. Financial information and valuations should be confirmed by outside auditors. In addition, the fund managers should expect to be required to provide detailed qualitative and quantitative assessments of the financial and impact performance of all of the portfolio companies. Written reports should be supplemented by regular meetings between the fund managers and the investors in the fund. If possible, arrangements should be made for investors to visit the facilities of portfolio companies and meet with their managers. Good communications with the fund’s investors is essential for smooth relations and building a long-term foundation that results in the investors supporting future projects of the fund managers, such as participating in new funds that the managers may decide to launch.
Fund managers should be familiar with the Private Equity Principles promulgated by the Institutional Limited Partners Association (ILPA) (https://ilpa.org/), which provide guidelines to fund managers regarding the terms that investors are likely to require in the fund documents.34 The ILPA has made a large library of templates, standards, and model documents publicly available, all of which have been prepared in alignment with the following general principles relating to the actions of the fund managers, referred to as the “GP,” and their relationship with the investors, referred to as the “LPs”35:
Alignment of Interest
• Alignment of interest is best achieved when the GP’s wealth creation is primarily derived from a percentage of the profits generated from the GP’s substantial equity commitment to the partnership, after LP return requirements have been met.
• Decisions made by the GP, including management of conflicts of interest, should take into account the benefit to the partnership as a whole rather than to the sole or disproportionate benefit of the GP, affiliates, or a subset of investors in the partnership.
• GPs should establish and disclose written policies and procedures to identify, monitor and appropriately mitigate conflicts of interest.
• The source and value of any material benefit accruing to the GP as a consequence of being the investment manager to the partnership should be disclosed at least on an annual basis.
Transparency
• LPs should have timely access to and notifications on relevant information pertaining to the GP and management of the partnership’s investments, including changes in GP ownership; material decisions and actions involving affiliates and related parties; arrangements between the GP and underlying portfolio companies; non-routine interactions with the regulator of record; material ESG matters pertaining to the portfolio; and policy violations.
• All disclosures provided to investors, including those on costs and charges, should be clear, complete, fair, and not misleading.
• Fees and expenses charged to individual LPs and the partnership as a whole, as well as carried interest calculations, should be regularly and consistently disclosed and subject to periodic review by the LP Advisory Committee (LPAC) and certification by an independent auditor.
Governance
• Fees should be reasonable and based on the normal operating costs of the fund; the partnership should not incur expenses that could rationally be expected to be covered by the management fee as a cost of operating the fund.
• GPs should neither undertake nor seek to “pre-clear” actions through overly broad disclosures that constitute or could potentially constitute a conflict of interest between the fund, a portfolio investment, and/or a portfolio manager on one hand and the GP, key persons, affiliates, etc. on the other without the approval of the LPAC.
• GPs should make an affirmative statement of the standard of care owed to the fund and should avoid language allowing for the disclaiming of fiduciary duty to the fullest extent of the law.
• LPACs should be thoughtfully constructed, mandated, and managed as an important adviser to the fund, particularly around conflicts of interest, without obligating LPAC members to serve as fiduciaries of the fund themselves.
• LPAC members should be held to minimum participation standards.
• LPAC meetings should be followed by an in camera session organized by the GP.
The design and structuring of impact investing funds must take into account all of the issues and concerns mentioned in the principles above; however, special consideration needs to be given to impact measurement, management, and reporting. Prospective investors will expect that the fund managers will be deploying various tools and standards to measure the impact of the fund’s investment activities. In addition, fund managers should create internal structures to incentive their team members to achieve the fund’s environmental and social impact goals. Fund managers should also commit to securing agreements from the managers of portfolio companies to pursue impact targets as a condition of receiving the fund’s investment. The limited partnership or operating agreement should include provisions relating to impact measurement and reporting, such as a requirement that the fund managers submit written social and/or environmental impact reports to the investors, no less frequently than annually, that include at least three to five recognized impact metrics and a narrative impact report that analyzes the metrics and provides other information to investors in the form of case studies. The impact reporting should address how unforeseen outcomes from the investment activities might lead to changes in the fund’s social impact thesis. Impact reporting and transparency, including sharing of data, is particularly important to investors, since many of them are just getting started in impact investing and are eager to learn from the experiences of the intermediaries in which they are participating.
While every situation is different, in general the process of designing and structuring a new fund, going out into the marketplace to find investors willing to participate in a “first close” and completing the fundraising efforts while beginning to make investments using funds collected from the first close runs between eighteen and twenty-four months. According to surveys of fund managers conducted by the GIIN, the first six months, referred to as the “First Launch” phase, including activities such as developing fund thesis and design; identifying target investors; finding an anchor investor, sponsor, or both; deciding on a placement agent; determining and establishing an operational platform; and preparing marketing materials. During the next six to twelve months, referred to by the GIIN as the “Go-to-Market” phase, the fund managers will be contacting potential investors, who will conduct a thorough vetting of the fund’s operational competence and the ability of the fund managers to execute on the claims made in the fund’s offering documents. Among other things, prospective investors will validate the fund’s investment and impact thesis; evaluating the fund managers’ strategy for achieving impact; assess the experience of the fund managers and their supporting team; visit the offices of the fund and companies in the fund’s pipeline; analyze fund economics; and assess the fund’s operational platform and resources. Surveys indicated that investors will closely scrutinize how fund managers act during the due diligence process, since an investment in the fund will be a long-term relationship that must be based on trust, engagement, and communication. The goal of this second phase is to get to an initial close that provides the fund with sufficient capital to make initial investments and ramp up its operational activities. Additional closing should occur within one year of the first closing and the documents generally require that fund managers must complete their fundraising within a specified period after the initial close.36
1 When used herein, the term “fund manager” should be construed broadly to include managers of the full range of intermediaries described in the previous chapter including charities and other nonprofit organizations that pool contributions from a number of investors and impact investment funds including mutual funds, exchange-traded funds, money-market funds, venture capital, or private equity funds and hedge funds.
2 Impact Investing: Strategy and Action (Rockefeller Philanthropy Advisors Philanthropy Roadmap), 3–10.
3 Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 147. Rockefeller Philanthropy Advisors.
4 Adapted from Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 88–90. Rockefeller Philanthropy Advisors.
5 Id. at 149.
6 Id. at 152.
7 RFA suggested a number of peer organizations focusing on aspects of venture philanthropy and impact investment including the Asian Venture Philanthropy Network, Confluence Philanthropy, Catalytic Capital Consortium, the Case Foundation, European Venture Philanthropy Association, Global Impact Investing Network, Global Steering Group for Impact Investing, The ImPact, Mission Investor Exchange, Principles for Responsible Investment, Skoll World Forum, Social Capital Markets, and Toniic. Id. at 152 and 173.
8 Id. at 156.
9 The investment committee may also form an internal advisory committee to provide support in sourcing investment opportunities, conducting due diligence and creating the processes and systems discussed below.
10 Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 157. Rockefeller Philanthropy Advisors.
11 Id. at 159.
12 Id. at 158 (also recommending use of various tools such as grants or portfolio management software, customer-relationship management systems, project management systems and document management systems).
13 SEC Adopts Interpretive Guidance on Investment Adviser Fiduciary Duty. Shearman & Sterling. June 27, 2019.
14 Manhattan Eye, Ear and Throat Hospital v. Spitzer, 186 Misc. 2d 126, at 152 (NY, 1999).
15 Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners (Rockefeller Philanthropy Advisors, 2020), 164. For discussion of other legal consideration, such expenditure responsibilities, self-dealing, excess benefit transactions and tax and accounting consideration for PRIs, see Id. at 165–167.
16 Id. at 167, 169 and 173.
17 https://impact.mofo.com/funding-financing/social-impact-funds-structuring-considerations/
18 Participation of certain types of investors in an impact investment fund may lead to complex additions to the basic structure, although experienced fund managers should be able to make the necessary accommodations fairly easily and flexibility to make the changes will be built into the partnership or operating agreement from the beginning. For example, nonprofits will be concerned that by investing in fund structures as a “pass-through entity” for tax purposes (i.e., a partnership or LLC) the underlying investments of a fund will cause their activities to be characterized by the business of the underlying investment, thereby raising the risks of unrelated business income tax and that their activities do not exclusively serve its exempt purposes. These issues will typically be addressed by inserting a corporate blocker in between the nonprofit entity and the underlying partnership or LLC. Id.
19 Id.
20 While liquidation is generally done by selling securities in the fund’s portfolio and distributing the cash to fund investors there are instances where the securities themselves are distributed to the investors, although most investors prefer that the fund managers make the decisions regarding holding or disposing investments since they are in a better position to understand how the underlying businesses are operated.
21 A number of databases have been created to collect and present information on impact investment opportunities, both funds and products. For example, RPA has prepared a library of impact investment profiles that include a table with a snapshot of the proposed impact and investment, an overview of the impact to identify the problem/need, a description of the market and the investment’s proposed response. Investors can learn about the fund’s impact approach, themes, sectors and geography and various investment strategies such as asset classes and structures. See www.rockpa.org/impactinvesting. The GIIN open access database allows investors and intermediaries to sort through over 1,000 impact investment opportunities. See www.globalimpactinvestingnetwork.org.
22 https://impact.mofo.com/funding-financing/social-impact-funds-structuring-considerations/
23 https://unpri.org/hedge-funds/responsible-investment-ddq-for-hedge-funds/125.article
24 Private Equity Investors Embrace Impact Investing, Bain & Company (April 17, 2019), https://bain.com/insights/private-equity-investors-embrace-impact-investing/
25 https://thegiin.org/developing-a-private-equity-fund-foundation-and-structure/
26 Id. Other reasons cited by investors for why fund managers fail to secure capital markets included lack of a balanced team who can execute for financial and impact returns and a substantial deal flow pipeline that indicates an ability to find good deals and deploy capital.
27 Fleishhacker, E., and R. Young. 2019. “Practical Tips and Considerations for Preparing PE Impact Investment Fund Offering Documents.” Private Equity Law Report, May 28, 2019.
28 https://thegiin.org/developing-a-private-equity-fund-foundation-and-structure/
29 Id.
30 Id.
31 While the structure of limited partnership and operating agreements is relatively standard across jurisdictions, the domicile of the fund will depend on the preferences of the target investors, tax considerations and other regulatory issues such as restrictions on the flow of investment funds.
32 Mac Cormac, S., J. Finfrock, and B. Fox. 2019. “Impact Investing.” In The Lawyer’s Corporate Social Responsibility Deskbook, eds. A. Gutterman et al., 238. Chicago: American Bar Association. Investors will also insist that the “purposes and powers” provision of the agreement have consequences and that the agreement include remedies for material deviations from the fund’s missions and procedures for determining whether a material deviation has occurred. In addition, provisions should be made for allowing tax-exempt entities that make programrelated investments (“PRIs”) into the fund to exit if the fund’s mission changes in a way that could jeopardize the PRI’s tax exemption or the tax-exempt status of the investor itself. Id.
33 Mac Cormac, S., J. Finfrock, and B. Fox. 2019. “Impact Investing.” In The Lawyer’s Corporate Social Responsibility Deskbook, eds. A. Gutterman et al., 238. Chicago: American Bar Association.
34 According to its website, the ILPA engages, empowers, and connects limited partners (LPs) to maximize their performance on an individual, institutional, and collective basis and boasts of having more than 500 member institutions representing more than $2 trillion of private equity assets under management (50 percent of global institutional private equity investment). Members represent all investor categories of small and large institutions including public pensions, corporate pensions, endowments, foundations, family offices, insurance and investment companies, development financial institutions, and sovereign wealth funds.
35 Institutional Limited Partners Association, ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners (2019), 9 (“Principles in Summary”).
36 https://thegiin.org/developing-a-private-equity-fund-foundation-and-structure/