Over the past decade or so, the private equity community has shown increasing interest in partnering with nonprofit corporations. Often, a private equity firm or one of its portfolio companies hopes to monetize something unique that the nonprofit owns or controls: perhaps the nonprofit’s intellectual property, a network of contracts or relationships, or a brand or reputation. Or maybe the relationship is one that can signal social consciousness, a signal that has become very important in today’s world. Or sometimes, a relationship with a nonprofit would allow the pursuit of dual objectives, doing good while doing well.
For their part, the nonprofits have their own motivations in forging relationships with private equity partners. These range from a belief that a significant source of capital or knowhow is essential to achieve the underlying charitable goal to just wanting a way to generate income. The motivation for the nonprofit often is a powerful one.
There have been a number of recent state law initiatives designed to facilitate these kinds of collaborations. Examples include Low-Profit Limited Liability Companies and Benefit Corporations. For a host of reasons, these innovative models have not worked, leaving the private equity community to focus its attention on forging joint ventures or similar collaborations with a nonprofit partner.
Private equity firms, however, quickly learn that partnering with nonprofits introduces a whole new world of considerations and constraints. Aside from the business and legal impediments and considerations typical in any venture, the nonprofit partner must address a host of other issues under state nonprofit law and tax law. Issues relating to private inurement, private benefit, unrelated business income, excise taxes on prohibited activity, private foundation rules, joint ventures. And more.
The rules unique to nonprofits can be confusing, inherently inconsistent and even sometimes irrational. Parties seeking collaboration often are frustrated by these extra layers of constraints. But there are pathways for successful collaborations.
In the attached article, Mark Hoenig, a senior partner in Weil’s Tax group, explores this intersection between the typical issues confronting multi-party ventures and the special rules introduced when a nonprofit is added to the mix.