Navigating Investment Structures for Social Finance Intermediaries: Charitable Status or LP?

The analysis in this article is generic in nature and must not be construed as advice to any third party. Every Boann investee should engage their own legal counsel to advise on these matters in relation to their own specific circumstances. 

As a fund manager for the Government of Canada's Social Finance Fund (SFF), our team at Boann Social Impact plays a critical role in supporting social finance intermediaries (SFIs). To better understand the suitability of different investment structures for SFIs that are built for registered charities, we went on a deep dive to understand what investment structure best serves our investees, social finance intermediaries, and the social finance market: unsecured loans or sticking with the trusty equity investments in limited partnerships (LPs)? 

To help explain this complex challenge, we roped in Brian Smith, our Managing Director of Engagement and Market Development. Brian has experience using a variety of legal structures to deliver social finance which makes him a great candidate to delve into this topic. He is a community-focused impact investing and social innovation expert who cares deeply about the success and sustainability of the social finance ecosystem. Here’s what Brian has to say:

The Investment Challenge: Debt or Equity? 

Boann's mandate is to provide repayable capital to SFIs, which, in turn, invest in social purpose organizations to address the critical issues of our time including climate change, housing affordability, and the inclusion of all Canadians. This is a noble pursuit, but let’s face it—when money is involved, things can get about as complicated as explaining modern art to your skeptical uncle. While Boann has leaned toward LP investments, primarily for the benefits that are laid out below, some SFIs with charitable status would prefer to avoid the organizational labyrinth and instead secure funding via promissory notes. 

Equity Investments: A Trusty Workhorse (With Some Extra Feed Costs) 

When an investor buys into an LP, it’s essentially securing a front-row seat to the action—limited liability, built-in governance rights, and a clearer view of where the money goes. This setup has some distinct advantages: 

That said, LPs come with their own baggage. They require legal paperwork that could make a grown person weep, and there’s the ever-present concern—who foots the bill for all this structural wizardry? Some investors worry about having to spend precious investment capital just to cover the setup costs or that those additional costs get carried through to increase the cost of capital to the SPO on the frontline. 

Unsecured Debt: A Free-Wheeling, Hold-On-Tight Approach 

If an investor hands over money via an unsecured loan, it keeps a claim to repayment but loses any real governance power. This road comes with a few potholes:

On the flip side, some seasoned investors argue that promissory notes, if legally beefed up, could work just fine. After all, charities are already used to juggling multiple grants and contributions under strict reporting standards. 

Looking to the Future: What Kind of Social Finance World Are We Building? 

Let’s take a step back and think big picture. Thirteen years from now, when the SFF has run its course, what do we want social finance to look like? Will LPs still be the best option, or will a new model emerge? Should we be building a system flexible enough to accommodate both LPs and debt instruments? And, most importantly, how do we ensure private investors also evolve to better align with impact investing, rather than forcing outdated structures on a new generation of social finance intermediaries and SPOs?  We are going to need aligned investors from the private sector if we are to bring capital in the order of magnitude required. 

So, What’s the Best Move? 

For both investors and their SFI investees, LPs provide solid transparency, governance, and separation of funds. Sure, they take a bit of effort to set up, but they can help keep everything structured transparent and fair. But let’s not ignore the argument that a well-structured debt instrument could also get the job done—without all the legal acrobatics. 

The legal memo acknowledges that charities themselves might not care whether they receive funding via an LP or a loan. If that’s the case, maybe we should let the sector dictate its own preferences, rather than implementing a one-size-fits-all model. More coordination among investors could help strike the right balance between oversight, efficiency, and making sure investees don’t have to spend half their budget on legal fees. 

At the end of the day, social finance isn’t just about maximizing financial returns—it’s about building a system that works and is sustainable in the long-term. And that, friends, requires a little bit of flexibility, a dash of pragmatism, and maybe even a stiff drink now and then.