Impact starts with corporate ESG for three ex-Aviva investors’ impact debt fund

Eiffel Investment Group has raised €576m for Impact Debt II – an Article 9 fund that incentivises corporate ESG improvement through margin discounts and increases.

Impact firm Eiffel Investment Group is pursuing a strategy of incentivising ESG improvement at mid-cap corporates through loan margin increases and discounts for its latest fund.

Eiffel’s impact debt strategy, established by three former members of Aviva Investors’ private debt team, has reached a first close for its second fund on €576 million. The fund’s €800 million target puts Eiffel among Europe’s largest impact debt fundraisers: by comparison, Amundi’s senior impact fund has so far raised €650 million against a €1 billion target, and Kartesia is seeking €500 million for its impact debt debut.

Eiffel is targeting returns of around 5 percent IRR for this fund, according to a source familiar with the fund. Eiffel declined to comment on target returns.

The firm will seek Article 9 designation under the Sustainable Finance Disclosures Regulation, which permits such funds to be promoted with objectives of “sustainable investment… or a reduction in carbon emissions”, the SFDR regulation states.

Eiffel’s impact strategy focuses on improving borrowing companies’ ESG practices through financial incentives. Borrowers are rewarded with loan margin discounts if they show progress on predetermined ESG KPIs and penalised for failing to fulfil these KPIs with loan margin increases, co-founder and associate director André Gonçalves told New Private Markets. Borrowers do not need to have a positive social or environmental mission statement, and loan capital will not necessarily be used for ESG improvements. “What is very important for us is the will to change,” said Gonçalves.

The percentage of the margin contingent on ESG KPIs is determined on a “case-by-case basis” for each borrower, “but for a 5 percent margin it would be up to 50 bps”, said Gonçalves. “It can seem that we have less impact than private equity funds because we have fewer means in private debt. Interest is the strongest lever we have in private debt. The fact that ESG KPIs are included in the legal documentation is a strong driving force.”

Eiffel will agree with each borrower on around three ESG KPIs before Eiffel invests. KPIs typically address the borrower’s environmental impact, employment conditions and workforce demographics, such as reaching carbon emissions reduction targets each year or employing target percentages of under-represented groups. “If the company is already performing strongly [in its own operations], we look into its supply chain,” such as addressing Scope 3 emissions, said Gonçalves.

Gonçalves joined Eiffel in 2019 with Antoine Maspétiol and Marie Bursaux, his colleagues on the corporate private debt investment team at Aviva Investors, to launch the Eiffel Impact Debt strategy. Fund I of this strategy, which pursues a similar strategy to Impact Debt II, closed in 2021 on €576 million with Aviva among its investors. The firm has also closed Croissance Directe, a mezzanine debt strategy in 2017; Energy Transition I on €350 million in 2018; and Essentiel Fund, a venture debt strategy, on €500 million this year.