Climate investor with ESG-linked carry approaches hard-cap

TiLT Capital, an energy transition-focused private equity firm, has raised €250 million for its debut fund and is aiming to hit its €300 million hard-cap by October, the firm said.

The fund has two areas of focus – energy efficiency and the “flexibility of energy systems” – and backs small and medium sized industrial businesses in France and wider Europe. Thus far, it has made four investments in businesses that play into the energy transition: three in France and one in Germany.

TiLT is the energy transition unit of Siparex, a multi-strategy private markets firm with circa €3.5 billion under management. Siparex Associés, the institutional investors behind Siparex, are among the LPs in TiLT Capital Fund 1. The European Investment Bank, the European Investment Fund and Bpifrance, as well as other unnamed banks, insurers and family offices, have made commitments.

TiLT, which was founded by three executives from the industrial sector in 2018, has tied a portion of its compensation to portfolio company ESG performance.

The fund is structured with the standard 20 percent carried interest, with a quarter of this  contingent on meeting targets relating to four “transversal” ESG themes and an additional one or two company-specific targets, said co-founder and managing partner Nicolas Lepareur. The four transversal areas are: decarbonisation (separate targets are tied to both the portfolio companies’ own emissions and the avoided emissions from their products); diversity (gender balance at board and management team level, as well as gender pay gap data); health and safety; and value creation (the financial inclusion of all employees in a portfolio company’s equity story).

These KPIs are also structured into the incentive plans for the portfolio company management teams, said Lepareur.

The inclusion of the value-creation element – aligning all employees into the equity growth story – is emerging as a theme among responsible investors in private markets and, said Lepareur, is becoming a more recognised, and in some cases expected, element of PE ownership by management teams. It is unusual to see it in the budding area of impact and ESG-linked carry programmes. KPIs typically tend to be tailored to individual companies’ “impact” (eg patient outcomes in healthcare) or they track more widely applicable ESG data, such as carbon footprints or senior-level gender diversity.

When the TiLT founders initially proposed the link between carried interest and ESG indicators in 2018 they were true outliers, Lepareur told New Private Markets. “We were told that it had not been done before and investors would not like it,” he said.

Their conviction to do so came in part from their first-hand experience in the industrial sector, where they found that health and safety performance was directly linked to financial performance.

“We don’t call ourselves an impact fund, because we believe this implies we are compromising on returns; we are a growth capital or private equity fund,” said Lepareur.