Campbell Lutyens is a placement agent and advisory firm that has placed 220 funds and raised $250 billion for private equity, infrastructure and private debt funds. The firm has eight offices around the world. New Private Markets spoke to Paula Langton, a partner and co-head of European placements at Campbell Lutyens and the firm’s sustainability lead.
What are investors asking of fund managers in due diligence?
Investors are now really focused on climate reporting. Before, they just submitted a generic ESG questionnaire. Now there are specific climate questionnaires around the TCFD, net zero emissions, Scope I, II and III. GPs, especially in Europe, are increasingly having to answer these.
What’s new in the market?
The biggest growth areas are climate and diversity. There have been a lot more social impact funds to date covering things like healthcare and education. But I think climate funds in particular are going to be the biggest growth area in the next 12 months.
We’ve seen growth in impact linked to carried interest. We saw fewer than five funds with this in 2019, but it’s about 15 to 20 GPs now. It’s not pervasive everywhere but some of the bigger impact funds are considering it.
Approaches to impact-linked carry vary considerably: the percentage of the carry linked to impact KPIs, what happens to the carry if the KPIs are not met, which KPIs are used, and how the data is audited. And we’ve seen more discussion around longer hold periods to drive a more sustainable agenda.
Are bigger private equity firms better positioned to meet this demand for climate funds?
It depends on the ethos of the private equity firm. How is a large GP considering 99 percent of its assets in non-sustainable assets and one percent in an impact fund? Are they integrating sustainability practices and best in class ESG to the rest of the portfolio? What are the motivations of the leadership team? There is no doubt that over time due to the climate emergency and increasing LP demand, all firms will need to embrace climate solutions whether that is through dedicated funds or across the entire organisation.
Have you ever seen managers turn away investors for ESG reasons?
Yes, we have seen certain funds consider the source of capital from investors’ underlying capital providers very carefully. In some cases, it might be excluding select geographies where a GP considers an LP to be from a country where there may be human rights issues or an extreme regime against women. And we have seen some sustainability or climate managers consider whether the revenues of the capital provider has come from carbon emitting industries. It is very case by case though.
And what do you require from your clients?
We have a really robust screening process around which clients we take on. We first look at the investment strategy and then we evaluate what investors think about them, what we think about them, what their ESG policies are, what their diversity is like. We’re focused on investment strategy and then we look inwards at ESG as well.
So, would you ever work with, for example, an oil and gas firm?
We wouldn’t raise an old-world oil and gas fund – and frankly, investors have shown they wouldn’t either. But if it’s a former oil and gas team, we’d see if they can demonstrate their commitment to energy transition and green solutions.
What do you ask a new client, specifically?
There are basic questions around UN PRI signatories, other memberships, their ESG policies. But that’s just scratching the surface. You want to know if a fund is taking it seriously. Are they actually monitoring ESG issues and implementing recommendations? Is ESG integrated into their strategies? Do they have a senior ESG professional? Is the investment team remunerated on ESG considerations?
We focus more on the environment. We consider: does the fund have a net zero policy? Are they assessing emissions within their portfolio companies? What are their targets? What are their travel policies?
Do you turn away clients due to their sustainability policies?
We probably turn away less than 10 percent for not having the right sustainability policies because by having the conversation you work out if that GP is receptive to change. We’d generally decline a manager if we don’t like the strategy, we’re not aligned, the GP doesn’t seem receptive to advice, the returns aren’t good enough, or they don’t reference well. There’s often a correlation between those questions and their sustainability or ESG considerations. If they’re not satisfying those things, then often the ESG part’s bad too. So, the decision to decline often comes before you’ve gone through all the ESG assessments anyway.