Social Impact Funds: Structuring Considerations

Impact investing, generally speaking, refers to investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. The market for impact investing continues to grow.

According to May 2016 data from the Global Impact Investing Network, approximately $77.4B is currently invested in impact assets across approximately 403 funds and products. This is up from the roughly $40B in assets across over 350 impact funds reported by a consortium of industry players in 2011.[1]

As our prior blog post on the subject indicates, impact investors fall into three types: (i) impact-first investors, who seek to maximize the social or economic impact of their investment with financial returns as secondary; (ii) investment-first investors, who strive for market or premium returns on their investments with positive social or environmental impact as a secondary goal; and (iii) catalyst-first investors, who seek to give or invest in collaborations to build the impact investing industry and infrastructure, giving equal weight to both social impact and financial returns. Social impact funds tend to fall into the first or second of the above categories, i.e., either impact-first or investment-first investors.

Social Impact Fund Structural Considerations

Social impact funds are most commonly structured as venture capital or private equity funds that seek to either integrate environmental, social, and governance (ESG) guidelines as part of their investment strategy, or invest directly in portfolio companies with direct or indirect ESG impact. Impact investment now attracts top-tier fund managers and has also attracted a more diverse investor base in recent years, as institutional investors outside of the typical impact investor realm of foundations, charities, and endowments become increasingly focused on ESG issues and have built social and environmental governance policies within their own investment framework.

When it comes to fund structure, the most common approach is for funds to be structured as for-profit limited partnerships into which qualified investors make capital contributions and the fund’s general partner deploys capital into portfolio companies that are viewed as having positive ESG impact based on the fund’s pre-existing guidelines.  The fund’s management is typically made up of a mix of investing professionals with not only a strong performance record from a financial perspective, but significant experience or familiarity in the social impact space. The fund’s limited partner advisory committee, if any, may also include key investors of the fund who have particular experience or whose organizations have social impact missions that are aligned with the fund’s investment guidelines.

Less commonly and somewhat less systematically, fund managers may also deploy impact capital by (i) making direct co-investments into an ESG company alongside another investment fund or strategic investor (usually through a special purpose vehicle), or (ii) establishing a joint venture with an ESG portfolio company directly.  Fund managers may also from time to time provide capital to ESG companies in the form of direct loans or grants.

Investor Considerations

From an investor perspective, one concern that frequently arises for nonprofits seeking to invest in social impact funds is that the underlying investments of the fund, if structured as a partnership or LLC, may cause the nonprofit’s activities to be characterized by the business of the underlying investment, thereby raising the risk of unrelated business income tax (UBIT) and the risk that the nonprofit’s activities do not exclusively serve its exempt purposes. The most typical approach to solving this issue is by inserting a corporate blocker in between the nonprofit entity and the underlying investment partnership or LLC.  Some social impact funds that expect to raise a significant portion of their capital from nonprofit entities and anticipate investing largely in partnerships or LLCs may go a step further by structuring the fund as a corporation rather than a limited partnership from the outset in order to alleviate this concern from multiple investors.  Foundation investors must also navigate the potential conflict of interest and excess business holding issues that may arise from investment activity as well.

Going Forward

Structural and investor considerations are important factors in weighing the right social impact fund structure. With the wealth of options for those interested in impact investing, the most important tool is an adept advisor to assist in weighing options, understanding structuring of funds and transactions, and overall corporate governance.

Morrison & Foerster is one of the most knowledgeable firms in this space. The firm represents:

  • impact investors
  • venture funds
  • private equity funds
  • mezzanine funds
  • nonprofit and for-profit social enterprise companies

Our work spans all aspects of impact investing, including advising on corporate forms, forming social impact private funds, advising limited partners and institutional investors who are seeking to invest in social impact funds, and structuring transactions to help ensure impact.

For more information, contact


[1] A Market Emerges: The Six Dynamics of Impact Investing, October 2012. Published by The Impact Investor: People & Practices Delivering Exceptional Financial & Social Returns.