With the creation of the first private investment funds that were intended to pursue social goods in addition to financial returns—commonly referred to as “impact funds”—impact-oriented investors were able to pool their resources and enlist the assistance of professional fund managers in carrying out their aims. While impact funds were a great step forward, they are still held back by a variety of factors: a lack of clarity as to what an impact fund is, a lack of trust due to real or alleged “greenwashing,” and a lack of appropriately balanced incentives for fund managers.

We believe that the next step in the evolution of impact investing is the Delaware statutory public benefit limited partnership, or “benefit fund,” an investment fund structure that has been used by Samaritan Partners Fund I, LP—a benefit fund the authors have had the privilege of advising. Like its corporate analog, the “benefit corporation,” a benefit fund provides certainty around how public benefit will be pursued alongside financial returns, while otherwise maintaining the flexibility that makes the limited partnership the standard form for nearly all US investment funds. We hope that this article will raise awareness of the benefit fund model and begin a conversation about how it can be best improved and utilized going forward. As it currently exists, the benefit fund already solves several key issues plaguing impact investing, which we will explain. However, there is also still progress to be made: We believe that updates to Delaware’s benefit fund statutes, certifications like those that exist for benefit corporations, and standardized documents that reflect best practices for benefit funds would make the benefit fund the gold standard and maximize the capital invested in companies pursing social goods.

What is a benefit fund and how does it differ from other funds?

Traditional venture capital funds and private equity funds pool capital and make investments in order to maximize financial returns for investors, and impact funds expand their objectives to include social impact as well. But, like traditional funds, impact funds are nearly always formed as Delaware limited partnerships, which provides substantial flexibility in determining the how the fund will operate, permitting impact funds to seek social impact alongside, or even ahead of, financial returns. However, this flexibility creates ambiguity and has its downsides: Different impact funds can have substantially different terms, raising costs and increasing the burden on investors seeking to determine whether an impact fund will strike a balance between social good and financial return that aligns with their expectations and values.

Read the full article about benefit funds by Frank J. Martin and Brandon Leppke at Stanford Social Innovation Review.