Last fall, Wharton Social Impact Initiative announced a collaborative project with Penn Law’s Entrepreneurship Legal Clinic. In collaboration with Anne Tucker, an associate professor of law at Georgia State University, and supported by four Penn Law students through the Social Impact Fellowship, this cross-campus collaboration aimed to advance our ongoing impact investing research and provide new insights into impact targets, legal structures, and performance of private equity funds with a social or environmental mission.
This week we will publish a series of blog posts from these students, reflecting on their experience and what we’ve learned thus far. Tune in each day for new updates from the team. In today’s update, JD/MBA candidate Robert Thrasher shares what he learned about the special role legal documents play in facilitating impact.
Contract Terms and Core Values
One of my aims when I decided to come to Penn for my JD/MBA was to leverage Wharton’s strength in research and data analytics to expand my understanding of social impact. After seven years of working in nonprofit homeless services I had a base of experience on the nonprofit and company-level sides of impact but little understanding of the financing side, or impact investing more generally.
A research fellowship with the Wharton Social Impact Initiative provided just the opportunity I was looking for.
During this fellowship, I analyzed contracts at the fund and portfolio company level—including deal term sheets, operating agreements, loan agreements, etc.—to gather data on standard impact investing terms. While I learned the financing details of numerous impact deals, the experience also allowed me to leverage my background and my law school training to provide a deeper understanding of the questions at hand.
After many years of leadership experience in the nonprofit industry, I saw how a company’s values drove impact through the organization. When values were well considered in relation to the company’s mission, and when the company’s stakeholders bought into them, they served as terrific fuel and guides for the organization.
As I pored over hundreds of pages of contracts for my research (riveting stuff, I know), I began to consider the similar, or at least complementary, role of contract terms.
Consider this term, made up for effect but not altogether different from common investment restrictions I saw during my research:
“The fund shall not invest in any portfolio company that engages in the production, distribution, or trade of hazardous materials, including trans-boundary or radioactive waste, ozone depleting substances, and harmful pesticides. Nor shall the fund invest in any portfolio company that has not adopted anti-money laundering (AML) policies consistent with widely-accepted international convention.”
While the term may not roll off the tongue in a stump speech or inspire on a glossy poster quite like “Compassion and integrity guard all of our investments,” the contract term serves an important role of extending and giving meaning and clarity to the value. Without the contract term, impact interested investors may not know how a fund or portfolio company actualizes the impact that they market. In this way, the contract term promotes alignment and confidence between socially minded investors and the funds and portfolio companies that they invest in.
Clear alignment and confidence are even more important given that impact investing is relatively young, at least in mainstream investment circles.
Contract terms like the one above serve an important role in demarcating companies or funds willing to legally codify their social impact commitment from those that may go only as far as savvy marketing campaigns.
Clear impact contract terms also can reduce administrative friction along the investing chain of investor, fund board, fund manager, and portfolio company. So here’s to the unsung hero of impact investing—the limited partner operating agreement investment restriction contract term!
Robert Thrasher is a JD/MBA candidate at the University of Pennsylvania Law School and the Wharton School where he is majoring in Accounting and Finance. At Penn, Robert serves on the boards of Penn Law Advocates for the Homeless, Penn Law’s One for the World chapter, as well as Wharton Christian Fellowship. Prior to Penn, Robert worked in homeless services, driving best practice innovation as a senior leader at Atlanta Mission, the largest and oldest homeless service provider in Georgia. He also is the Board Chair of Athens PBJs, a nonprofit he co-founded in 2008 that builds community between the homeless and non-homeless populations in Athens, GA. Robert graduated with degrees in Accounting and Economics from the University of Georgia’s Terry College of Business.