Contracts with Benefits: The Implementation of Impact Investing
62 Pages Posted: 26 Apr 2018 Last revised: 6 Mar 2019
Date Written: March 1, 2019
Impact investing private equity and venture capital funds are a rapidly emerging force in capital markets, premised on the service of two goals at once: a financial goal as well as a social-benefit goal. The addition of this second objective complicates the already challenging problem of aligning incentives across layers of agency, and raises the question of how contracting practices should adapt. We draw on contract theory and a unique set of legal documents from impact funds to answer this both normatively and positively. Contracts struck by impact funds, both forward to portfolio companies and back to investors, use new terms to directly operationalize impact, and also adjust the use of existing terms on governance, investor protection, and other concerns to facilitate it. Moreover, funds’ direct contracting on impact with investors passes through to their contracting with portfolio companies. For the most part, observed contracting terms align with theory, though they also differ in interesting ways, such as on compensation and covenants. Finally, we find evidence that different forms of contracting serve complementary roles in supporting impact.
Keywords: impact investing, venture capital, private equity, socially responsible investment, sustainable investing, corporate social responsibility, contracts
JEL Classification: D64, D86, G24, G32, K12, M14
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