December 2015

Shortly after Mark Zuckerberg announced his pledge to devote 99% of his Facebook shares to philanthropic causes, a number of commentators went beyond the usual reaction to an endowment of such scale. They focused not on the potential impact of this commitment, but rather on the structure of the chosen corporate vehicle, the Chan Zuckerberg Initiative, LLC (“CZI”).

On the one hand, many writers and commentators criticized the LLC structure as a ploy by the Facebook founder to increase charitable deductions and therefore avoid paying taxes, while also generating a major PR return-on-investment. Zuckerberg defenders argued that the LLC structure offered flexibility, allowing for investment in non-profit and for-profit entities employing both traditional and innovative approaches to accomplish the goals of the CZI.

In his response to the commentary about the CZI structure, Mark Zuckerberg stated that CZI would indeed engage in some degree of for-profit social investment, also known as “impact investment”. While the motivations behind the CZI structure are valid subjects of debate and speculation, we think the potential for engagement and clarification in the impact investment space is far more interesting.

Impact investing is generally referred to as the practice of actively investing capital in enterprises that generate measurable beneficial social and/or environmental outcomes, along side an expectation of financial returns. Investors in this space employ traditional private investing tools and structures to their investment in a manner that can help to ensure that the capital invested goes to achieving a social or environmental outcome, while simultaneously generating capital returns on the invested capital. Some investors see these returns simply as good investment, while others view this as an opportunity to reinvest returns in the social or environmental mission, thereby multiplying the beneficial outcomes.

Many impact investors recognize the benefits and efficiencies inherent in for-profit incentive structures that are characteristic of private equity style investments, which can be used to drive social outcomes beyond what traditional philanthropic grant making can achieve. Investors in the impact investment space are thinking about more than just financial performance of a business. For example, over time certain outcome benchmarks may need to be met or the investor may have the right to exchange the equity received upon investment for the initial capital provided. Thus, measurement of the impact-result and performance is critically important, and using impact metrics that are efficient, effective and standardized will allow people to compare potential impact opportunities against one another.

As a major player in this developing field, CZI has the potential to encourage further clarification of impact measurements and best practices in this emerging sector of philanthropy. Moreover, considering the visibility of CZI, if the impact results are deemed favorable, philanthropists will be more likely to engage in this type of philanthropy, fostering even greater demand for clear metrics and consistent best practices in the way impact investment deals are done.

Click here more information on RPCK’s Social Finance and Impact Investing practice.

December 2015

Shortly after Mark Zuckerberg announced his pledge to devote 99% of his Facebook shares to philanthropic causes, a number of commentators went beyond the usual reaction to an endowment of such scale. They focused not on the potential impact of this commitment, but rather on the structure of the chosen corporate vehicle, the Chan Zuckerberg Initiative, LLC (“CZI”).

On the one hand, many writers and commentators criticized the LLC structure as a ploy by the Facebook founder to increase charitable deductions and therefore avoid paying taxes, while also generating a major PR return-on-investment. Zuckerberg defenders argued that the LLC structure offered flexibility, allowing for investment in non-profit and for-profit entities employing both traditional and innovative approaches to accomplish the goals of the CZI.

In his response to the commentary about the CZI structure, Mark Zuckerberg stated that CZI would indeed engage in some degree of for-profit social investment, also known as “impact investment”. While the motivations behind the CZI structure are valid subjects of debate and speculation, we think the potential for engagement and clarification in the impact investment space is far more interesting.

Impact investing is generally referred to as the practice of actively investing capital in enterprises that generate measurable beneficial social and/or environmental outcomes, along side an expectation of financial returns. Investors in this space employ traditional private investing tools and structures to their investment in a manner that can help to ensure that the capital invested goes to achieving a social or environmental outcome, while simultaneously generating capital returns on the invested capital. Some investors see these returns simply as good investment, while others view this as an opportunity to reinvest returns in the social or environmental mission, thereby multiplying the beneficial outcomes.

Many impact investors recognize the benefits and efficiencies inherent in for-profit incentive structures that are characteristic of private equity style investments, which can be used to drive social outcomes beyond what traditional philanthropic grant making can achieve. Investors in the impact investment space are thinking about more than just financial performance of a business. For example, over time certain outcome benchmarks may need to be met or the investor may have the right to exchange the equity received upon investment for the initial capital provided. Thus, measurement of the impact-result and performance is critically important, and using impact metrics that are efficient, effective and standardized will allow people to compare potential impact opportunities against one another.

As a major player in this developing field, CZI has the potential to encourage further clarification of impact measurements and best practices in this emerging sector of philanthropy. Moreover, considering the visibility of CZI, if the impact results are deemed favorable, philanthropists will be more likely to engage in this type of philanthropy, fostering even greater demand for clear metrics and consistent best practices in the way impact investment deals are done.

Click here more information on RPCK’s Social Finance and Impact Investing practice.