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Capza ties carry to ESG for latest private debt fund

The European fund manager will couple loan costs and its own carried interest to ESG KPIs for its sixth fund, says managing director Laurent Benard.

European private markets firm Capza will link loan costs to portfolio companies’ ESG performance for its next fund. It will also link a portion of its carried interest to ESG, the firm’s managing director Laurent Benard said.

Capza is poised to start raising its sixth private debt fund, for which it will forfeit some of its carried interest if it fails to meet its target of implementing an ESG incentivisation programme for portfolio companies, Benard told New Private Markets.

This target is for “the majority of loans” issued by Fund VI to be under this programme, but Benard declined to specify further. This programme involves offering portfolio companies an annual review of the loan’s margin and “offering a financial benefit” if the portfolio company meets certain ESG criteria.

Capza has already trialled this programme for one loan provided by Fund V, which is 75 percent invested, having closed last month on €1.6 billion. It also implemented this programme in October 2020 in Artemid III, a €400 million private debt fund it co-manages with Amiral Gestion.

The firm will conduct an ESG ‘diagnosis’ alongside its due diligence process to identify areas of improvement for each company it lends to, and will develop a custom set of KPIs for each company on issues such as energy consumption, waste, pay parity and gender diversification.

The amount of carry the firm will make – as a proportion of overall distributions – is linked to its successful deployment of its ESG incentivisation programme. Benard declined to comment on the fund’s headline carried interest rate, and how much of that is on the line.

Capza has €5.1 billion of assets under management and manages private debt and ‘flex equity’ – a combination of equity and mezzanine finance – funds in the technology, healthcare and business services sectors. It is headquartered in Paris and has offices in Munich, Milan and Madrid.

Capza’s sixth private debt fund will provide direct unitranche and mezzanine loans to small- and medium-sized European technology growth companies.

Benard said: “It’s important to make tech companies more ESG compliant. There are a lot of concerns about 5G, retaining talent, pay parity, energy consumption. Those issues are key to us.

“It’s about sustainable growth and supporting companies in their ESG transformation. It is key to LPs as well because those companies with superior ESG practices tend to be more sustainable, less volatile and more attractive for talents, so it’s lowering the risk level of the company.”

Last week, the firm announced it had hired Aurore Gauffre as its first head of sustainability & impact, alongside two new hires to the investor relations team and seven internal promotions.