Argos Wityu has reached a first close at €120 million for its debut impact fund, pitching a strategy of decarbonising SME companies for financial growth. Argos Climate Action is an Article 9 buyout fund with a €300 million target.
“There’s a lot of focus and money going towards green infrastructure, innovative technologies and transforming large corporations,” Jack Azoulay, senior partner at the firm and co-head of the fund, tells New Private Markets. “There’s a lot less to transform in everyday life SMEs – companies making our chairs, chemicals, windows or food, or transporting goods around, all sorts of things that we’ll still need in 10, 20 or 30 years, but that will need to be produced in a far less carbonised way.”
A handful of private fund managers have launched strategies for which a significant value creation lever involves sustainability action. Australian private equity firm Adamantem Capital, for example, introduced an emissions angle for its second buyout fund in 2020; all portfolio companies implement reduction targets that aim to either eliminate or offset emissions within a decade.
Argos Wityu, a European mid-market fund manager, launched Argos Climate Action in September 2022. The firm is targeting 2.5x gross returns for the fund, New Private Markets understands – matching that of its eighth flagship fund, which closed in 2022 at €450 million.
It is also targeting a 7.5 percent annual reduction in carbon intensity for Argos Climate Action’s portfolio. The firm has linked 25 percent of its carried interest to achieving this target.
The 7.5 percent figure is derived from EU’s Climate Transition and Paris-Aligned benchmarks for decarbonisation, which impose a 7 percent annual carbon intensity reduction. Argos Wityu was also guided by the ‘Fit for 55’ goal for the European Green Deal: the goal is for the EU to reduce its carbon emissions by 55 percent relative to 1990 emissions by 2030. Argos Wityu calculated this to require annual reductions of 7.2 percent, and then rounded up its own carbon intensity reduction goal.
A typical decarbonisation plan for a portfolio company will involve switching the company to low-carbon energy and maximising the reuse and recycling of goods and materials. Such plans add value to the company, says Azoulay: “Being the greenest in your industry can get you a very strong competitive advantage and give you an extra lever to grow faster.”
The competitive advantage is in, for example, attracting customers, attracting and retaining talent, and reducing operational expenses. But these advantages will usually be found where a company is significantly less carbon intensive than its competitors, said Azoulay: “You have to be clearly less carbonised, meaning you can make a real difference on customers’ own scope three emissions.”
‘Transformation’ impact investing strategies such as Argos Climate Action can only work for companies with certain characteristics, says Azoulay.
“If the company is too small, it’s very hard to have the management bandwidth to focus on the transformation of their company. You really need to have a few people willing to dedicate themselves to deeply decarbonising the company, and that’s hard to do in a less than 50-person company.
“When they’re large corporations, they usually already have teams dedicated to sustainability and can be more advanced on their decarbonisation path.” So Argos Wityu sees an opportunity among mid-market companies “in between these two categories”, says Azoulay.
The firm is targeting companies that “have tangible assets and a carbon footprint that we can work on,” says Azoulay, such as “an industrial company, a company in chemicals, in the agro-food industry, in logistics – all those sectors where you will probably find a significant initial carbon footprint”.
Asset-light businesses are unlikely to find their way into Argos Climate Action. “If we look at a consulting firm with very little assets and a very small carbon footprint, there won’t be much competitive advantage in turning the heating down and insulating the building to reduce its emissions – I don’t think anybody will choose that consulting firm compared to another one because of these actions.”
The firm recruited Azoulay and Sandra Lagumina last year as senior partners to co-head the fund. Four other partners from its flagship strategy also work on the fund.