October 23, 2017
Interviewed by: Privcap
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How to Get RE Impact Investing Right

Attorney Mandee Gruen, a partner at Goodwin, explains the specific challenges facing impact investors in the real estate space. 

Attorney Mandee Gruen, a partner at Goodwin, explains the specific challenges facing impact investors in the real estate space. 

How to Get RE Impact Investing Right

With Mandee Gruen of Goodwin

Privcap: How do you define and impact fund? Legally speaking, is it any different than a “regular” PE fund?

Mandee Gruen, Goodwin:

An impact fund is very much like any other private investment fund from a legal, or structural perspective. In addition to a financial return, the investors are also looking for an environmental return and a social impact. That’s the so-called “double bottom line,” or “triple bottom line,” if they go for all three. It’s become a big industry. The term “impact investing” became a buzz word about 10 or so years ago. It’s about a $15-billion industry now. Big players have gotten in and formed their own dedicated departments: Goldman, BlackRock, TPG, Bain Capital, just to name a few. Some were niche players and that’s who I’ve worked with specifically—CityView, Bridges Ventures, Urban View—[are] very focused on the affordable-housing real estate space.

Privcap: One of the enduring challenges with impact fund is measurement and reporting. Has that begun to get easier?

Gruen: There are certain funds I work with that have the social or environmental impact as a soft goal. Others have it as a specific “This is what we will meet” and the ability to do additional deals—the carried performance fee might be based off that, which, of course, begs the question of how do you measure impact?

That’s really what’s your funds? For renewable energy funds, what’s the carbon monoxide reduction? For timber funds, buyer diversity, conservation. [For] affordable housing, how many new affordable units are being brought to the market? Then, all of them—how many jobs have you created? It sounds kind of easy, but it depends on what your focus is. For someone whose focus is on health and wellness—reduction in carbon emissions obviously will impact health. That’s a long way out in the future and it’s not as easy to tell today what it’s going to be 15 years from now. Some of these become a bit of a longerterm life investment than you sometimes see in a more traditional market.

Privcap:  What types of investors tend to look for impact funds? Does the profile of the investor present any specific challenges?

Gruen: The typical investor base is high net-worth, family offices, endowments, foundations and strategic investors. Very much so. I think in the current political climate, it also does appeal to a wider variety of people. As the funds are able to show the ability to also produce a financial return, it will expand the market. For instance, in the real estate sector, if one of the ideas is to do some sort of opportunistic or value-add multi-family investment where you’re going on and you are creating something that is more environmentally friendly and green-certified, that will demand either a price or rent premium. While at the same time, hopefully, reducing operating and maintenance costs, really, actually providing a real financial return. The market may become expanded.

I think the traditional impact investors tend to be rather active investors and not so much your average, run-ofthemill, real estate investor who sits back and doesn’t expect to have veto rights over anything. These investors have their own mandates and their own stakeholders that they are trying to satisfy. If you have a development financial institution, a DFI, like IFC, they have very specific restrictions on what jurisdictions they can invest in. You might see tighter investment guidelines, more strict GP removal provisions, for instance, and more active LPACs.

Privcap: Does the potential additional administrative burden make impact investing a challenge for smaller funds?

Gruen: Sponsors generally face unique challenges in launching an impact fund. Specific to enhanced reporting, often they want to go down to the project level and have access to information on units brought to market, the demographics of the worker base, etc. Also, I think, given the risks associated with impact investing, depending on the environment or the jurisdiction you’re in, the investors may tend to impose greater clawback requirements so that there’s either an escrow and/or a guarantee on the clawback because of the nature of the risk. There might also be differences in what would be in different jurisdictions—you’re going to the emerging markets—the role of law is different and just dealing with that.

Also, I think one thing sponsors face that’s an interesting challenge and a unique challenge in the real estate and real asset impact space is having to deal with governmental players that you don’t necessarily have to always deal with, because many of these are set up as public-private partnerships and you’re dealing with the local government. You’re rezoning areas, you’re taking an industrial area and turning it into it multi-family housing. Your investment thesis depends very much on the ability to do these things and largely on tax credits and tax abatements, which may or may not be available at any given time depending on the political climate. It’s nuanced, it’s complex and it’s ever-changing.

Privcap:  What other complications arise for managers and investors looking to deploy impact capital?

Gruen: One of the unique challenges also facing sponsors in impact funds is fiduciary duty. What exactly is your duty to investors? Generally speaking, fiduciary duty means getting the best deal or the best price on exit and that might not be possible in an impact investment. Certain of your investors may require that, in your exit, you give to someone who will continue the impact and continue the mandate. That may not garner the best price, so I think one thing that’s very important is to make sure that the disclosure on the impact mandate and, no pun intended, the impact on the fiduciary duty of the mandate and what sort of exit you may pursue.

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