A year in Friday Letters: Energy transition, impact and ‘exciting’ regulation

This year New Private Markets introduced a weekly commentary. As we wrap up for 2022, we take a look back at some of the threads – and opinions – that made up the year.

Investing in the energy transition

In May we noted that, even amid the glut of climate funds being raised, it would not be a case of “too much money chasing too few climate deals”. Instead the issue would be “too much uncertainy and too few experienced managers”.

The same month we also pointed out that many institutional investors were now able to put mission-oriented capital to work using “familiar-looking private fund packages”. This was not a bad thing, we said, but for a mission as daunting as combating the climate crisis – which may require a cross-asset class approach – “they may need to embrace the unfamiliar too”.

Bridging the gap between the familiar and unfamiliar are energy firms that have retooled to become energy transition-focused investors. The likes of HitecVision and Longbow Capital convinced us that “there is a deep well of experience in the energy sector that needs to be tapped if we are to progress towards net zero.” The success of these two managers shows that “investors are on board with that”.

The business of impact

In a year in which GIIN asserted that the impact investing market had topped $1 trillion in assets under management, the business of impact investing has become more sophisticated and LPs are clearer-eyed about what they want. In June we observed that if they weren’t already doing so, impact GPs should think hard about differentiating themselves from the growing crowd of competitors, looking “to conventional private equity GPs who have doubled down on specialist areas and created differentiated brands successfully”.

One differentiator we continue to see is impact-linked carry. In September we looked at the growing “anti-ESG” sentiment in some US states and suggested that if investors consider fiduciary duty to be incompatible with sustainability considerations, then a mechanism that links a GP’s compensation to extra-financial metrics could be problematic. “It would create a slight kink in what is normally a quite straightforward ‘I win, you win’ financial alignment of manager and investor.” This kink, we concluded, could be managed like any other marginal conflict.

As the year drew to a close against a backdrop of tightened private markets fundraising, we found reasons for those raising impact funds to be optimistic. Newly created impact allocations, the arrival of more corporates as LPs and a climate theme in particular showing “no signs of cooling”, all help impact funds tell a compelling story to a willing audience. Some GPs, however, “may need to adapt their fundraising techniques to a changed LP market to reach their targets”.

Developments in data

In May we got excited about the US Securities and and Exchange Commission turning up the noise on ESG-related regulation. Not because we love regulation per se, but because “new rules that focus on disclosure get to the heart of one of the defining issues of ESG in private markets: standardised data”.

Standardised data collection and reporting, in particular relating to greenhouse gas emissions, has been the focus of a lot of productive work this year. A call to action from the Net Zero Asset Owners Alliance in November caught our attention. The weighty coalition of investors was making clear what sort of reporting it requires from its private markets GPs. This was a call, we thought, “that should cut through the climate noise”.

Discussion about ESG data remains – like death and taxes – one of the only real certainties in the world, we noted in October. While it may always be on the agenda, progress has been made around harmonisation such that “hopefully we’ll soon be discussing what the data tells us, rather than whether it exists”.

New Private Markets will be taking a break. We wish all of our readers a wonderful, restful holiday and will return to your inbox on 3 January 2023.