Goldman Sachs’ Sustainable Investment Group, part of the bank’s asset management unit, has held a first close on its debut fund.
It has raised more than $800 million for its Horizon Environment and Climate Solutions Fund, having launched in late March, and expects to exceed its initial $1 billion target when it holds a final close later in the year, Ken Pontarelli, the partner who leads the team, told New Private Markets.
The fund will make circa 16 growth equity investments into business that support one of five themes: “ecosystem services and water”; waste and materials; sustainable food and agriculture; sustainable transport; and clean energy.
Pontarelli declined to comment on the fee structure or target return, but said the vehicle was “akin” to a conventional 10-year private equity fund.
The Sustainable Investment Group has 13-strong dedicated investment team “that wakes up and thinks about nothing else”, but Pontarelli noted the ability of that team to leverage its position as part of a wider private equity group of more than 200 investment professionals.
The team has already agreed five investments worth a total of around $400 million with which to seed the new fund, said Pontarelli, so “investors have been able to see a significant piece of the portfolio assembly”.
Pontarelli said the segment of the market targeted by this fund – growth-oriented private equity deals with an investment bite size of between $25 million and $100 million – is less competitive than other areas of private capital markets.
“You would think with all the headlines around sustainable investing and ESG that valuations would be really high,” he said. “It sounds counterintuitive, but we have found that while this segment is experiencing a good growth backdrop, there is not a lot of institutional capital there. Valuations have been a lot more forgiving than in other areas of private markets.”
Pontarelli spent 25 years with Goldman Sachs, latterly as CIO for its West Street Energy Partners fund, before retiring from the firm in 2017 to set up Mission Driven Capital Partners, a growth equity investor seeking positive impact alongside financial return. He returned to set up Goldman’s Sustainable Investment Group last year.
“We have seen a lot of capital formation in infrastructure and in the venture capital space, but there is not a large number of firms operating at this size of the growth equity sector,” Pontarelli said. “There are clearly more coming, but in the context of global private equity there is relatively less competition.”
The environment and climate fund is intended to be the first of a series of private markets impact funds to be launched by the sustainable investment group, which will contribute to Goldman Sachs’ five-year alternatives fundraising target of $150 billion.
“The objective of the asset management division is to build a number of opportunities to invest across a broader impact thematic,” Pontarelli said. “There are other sections of the risk-return spectrum in which investors would want to participate in this environmental theme, and other ‘end markets’ of impact, such as healthcare.”
A small, but growing, minority of impact managers have introduced mechanisms to link their financial compensation – typically in the form of carried interest – to the quality of the impact their investments make. This is not something Goldman’s fund has done, said Pontarelli, because the investee companies are intrinsically impactful. “For all of our opportunities, there is no daylight between the financial success and the size of its impact. The more they grow, the more impact they create,” he added.
The firm has also invited some investors to join an impact advisory council, to engage on best practices around reporting. “There are so many different reporting frameworks out there; it’s really an alphabet soup,” said Pontarelli. “We have seen reporting evolve and it will continue to evolve, in the same way that financial disclosure has evolved and got deeper.”