AlpInvest, a subsidiary of Carlyle, has put in place its first ESG-linked subscription credit facility, the firm said on Monday.
The facility, which will be used for its freshly-closed $3.5 billion co-investment fund, has an interest margin linked to “measurable performance indicators” including “AlpInvest’s investment process, engagement activity and transparency”, said the firm.
In an emailed statement to New Private Markets, Maaike van der Schoot, AlpInvest’s responsible investment officer, described the KPIs by which the co-investment fund will be measured.
One relates to the annual rating given to AlpInvest by the UN’s Principles for Responsible Investment. Each year the PRI assesses the extent to which its signatories have embedded responsible investment into their processes and gives them a confidential rating to allow them to benchmark against peers. “PRI is a relative score and as the investment community moves forward in integrating responsible investment, this KPI relates to improving our rating,” said van der Schoot.
Other measures relate to: AlpInvest’s “ESG engagement efforts with GPs” in terms of providing feedback on how they “can evolve their responsible investment approach”; the firm’s incorporation of ESG into its co-investment due diligence process; and the firm’s “ESG transparency and reporting”, whereby GPs in which the firm has invested are compared with each other “on selected ESG themes and indicators”.
A third party will be hired to provide assurance to the performance against these KPIs, said van der Schoot.
Asked how performance against the KPIs will be communicated with AlpInvest’s clients, van der Schoot said the firm will “actively communicate with our investors on the facility and the KPIs”.
As with other examples we have seen in the budding market for ESG-linked credit facilities, some information remains confidential. It is not known, for example, how much the cost of the facility could increase or decrease in line with performance. It is also unclear whether any ESG-driven discounts (or penalties) would be borne by the fund, the manager or a combination of the two.
ABN AMRO arranged the facility as lead facility agent and Rabobank acted as sustainability co-ordinator.
The market for ESG-linked credit facilities is still in its early stages. Singaporean healthcare-focused private equity giant Quadria Capital burst open the door little more than a year ago, in October 2019. French firm Eurazeo followed in January 2020, with the first EMEA facility. KKR then kicked off the US market with a green line for its $1.3 billion global impact fund in June, and EQT Partners made something of a name for itself as a market leader by closing on two lines; one also in June and another – reportedly the biggest yet, at €2.7 billion – in November.
The amount the cost of a facility flexes in line with ESG performance is rarely if ever disclosed, but is only really part of the incentive, according to Fi Dinh, director at ING Bank in Singapore, which acted as lender to Quadria on its $65 million ESG-linked line.
Speaking to affiliate publication Private Funds CFO earlier this year, Dinh said: “From a manager perspective, a few basis points discount or penalty is a consideration, but if the targets are not met, the more meaningful consequence is having to explain to their investors why they didn’t meet their targets.”
Carlyle, the listed firm that owns AlpInvest, boasts the largest ESG-linked credit facility in the US to date. In February it secured a $4.1 billion revolving credit facility for its Americas corporate private equity funds “with the price of debt directly tied to the firm’s previously set goal of having 30 percent diverse directors on the boards of Carlyle controlled companies within two years of ownership”, the firm said.
Graham Bippart contributed to this report.