Texas targets private equity with gun "anti-discrimination" law

Texas legislators last summer passed a bill called S.B. 19 that prevents state government entities from entering into contracts "with companies that discriminate against firearm and ammunition industries."

Why it matters: This could cause heartburn for some private equity and venture capital investors, as certain limited partners demand "sin clauses" that include weapons investment restrictions.

• Per the bill, "companies" could include limited partnerships like PE or VC funds that are receiving commitments from Texas state pension funds (the three largest of which report more than $50 billion worth of such assets).
• Such companies must go beyond simply not having a prohibition on doing business with the firearms or ammunition industries. They must provide the government entities with written, affirmative verification that no such policy exists.

Big picture: Sin clauses used to be more standard in limited partnership agreements, applying to such things as weapons, alcohol, marijuana, gambling and pornography.

• But time and tech have complicated matters: DoorDash delivers alcohol. TikTok has porn. DraftKings is a betting app. Drones can be fitted with weaponry, and smart guns could help reduce teen suicides. Marijuana has gained legality and lost stigma.
• Sin clauses therefore have become more bespoke, driven by individual LPs and usually tucked into side letters. But they still do very much exist, and even a single-LP carveout on weapons could, in theory, fall afoul of the Texas law.

What they're saying: Nothing. The state senator who authored S.B. 19, Charles Schwertner, didn't return repeated interview requests; my goal was to ask if he intended his bill to apply to state pension system investments.

• Also no comment from UTIMCO or Texas TRS; maybe because several sources say that neither LP has been asking for the written verifications.

Worthy of your time: The NY Times' Steve Gandel recently wrote a smart piece on how the Texas law is impacting banks.

What to watch: Texas isn't the only state to pass this sort of gunmaker protection bill. Wyoming has one too, and they're being considered elsewhere. Meanwhile, states like Massachusetts have mulled laws that would prevent government pension funds from investing in firearms or ammunition companies.

• At some point, if not already, PE/VC fund managers will need to decide whose money they want to take — as investor demands will conflict.