Oxfams £1 billion loan to
Mongolias Xac Leasing blurs the line between private
equity funds and not-for-profit organisations.
The transaction highlights the growing trend of
impact investments, or utilising private equity strategies for
investments focused on the greater good. It also signals
environmental, social and governance (ESG) issues becoming more
important for private equity funds.
However both trends raise questions about the
for-profit and non-profit status of companies, and may signal
the introduction of new corporate structures.
Charities are excited about impact investing
because regardless of budget, there are still billions of
people in poverty and never enough resources, said
Matthew Kasdin, legal advisor for Impact Investment
Exchange Asia (IIX), a platform for social enterprises to
raise capital. They see impact investing as a way to
scale up their impact.
Impact investments involve making investments in
both for-profit and not-for-profit social enterprises which
prioritise their missions over the business side.
But its exact definition is not settled. Some
believe that impact investments should earn a pure market rate
of return while others believe they should earn a so-called
muted return not as much as in a traditional
That isnt necessarily settled in the
industry, and I believe it never should be, as it is better to
have a big tent servicing all investor appetites,
It is essential that companies structure themselves
for impact investments, and that investors are made aware of
any of the companys goals that differ from those of
Social enterprise goals can be built into legal
documentation. In a recent deal completed by IIX in the
Philippines, the documentation included a investor
representation that they recognized they were investing in an
impact enterprise, and that management would be making
decisions to advance the companys social mission rather
than to solely maximise profits.
The companys social mission was built
into its articles of association and it was required to report
on its social impact, he said.
Traditional corporate or non-profit structures
often do not fit a social enterprises needs, and there
has been a push to introduce new corporate structures to
encourage impact investors.
Kasdin said there has been a movement to form new
legal structures and accommodate social enterprises. In the US,
these take the form of benefit corporations and low-profit
limited liability companies, called L3Cs. In the UK, there is
the community interest company, while Korea has a special
social enterprise law. The Philippines and other Asia-Pacific
jurisdictions are following suit
What it means for private
Impact investments have taken off as ESG issues
become more important to private equity firms. IFLR recently spoke with Kohlberg Kravis
Roberts (KKR) director of European corporate affairs
and head of sustainability about the firms focus on ESG
But as the asset class becomes more prominent,
counsel warn about blurring of the line between not-for-profit
and for-profit organisations and activities.
A private equity lawyer agreed that ESG issues have
come into focus in the last year as more investors require
firms to disclose their social and corporate governance
policies. These factors have long been a concern for
multilateral investors such as the Asia Development Bank and
the International Financial Corporation.
However maintaining charitable status in some
jurisdictions prohibits firms from participating in any
activity for profit. Its untested ground for a lot
of countries, the counsel said.
A level playing field for private equity firms and
impact investors is also a concern as the investment process is
nearly the same for impact and private equity investments.
Private equity firms are especially wary of tax breaks
charities receive, although they are participating in similar
For US charities non-charitable activity such as
impact investments will be taxable, though it is still unclear
how taxation will work in other jurisdictions.
Some private equity funds are looking into impact
investing. Indias Motilal Oswal Private Equity recently
established a Rs 250-300 crore fund for investments in
social enterprises. As impact investing becomes more popular
and private equity further focuses on ESG issues, there may be
more competition ahead for investment into well-run companies
focused on social issues.
KKRs guide to responsible