Lack of clarity on the EU Sustainable Finance Disclosure Regime is pushing private markets firms to “make some tough decisions,” according to Tycho Sneyers, a managing partner of LGT Capital Partners and board member of the UN-backed Principles for Responsible Investing.
“Guidance will become clearer over time,” he tells New Private Markets, “but time in this case is measured in years, not weeks, and you need to deal with that uncertainty – you need an approach and to make some tough decisions.”
Sneyers speaks to New Private Markets following the close of LGT Capital Partners’ first dedicated impact fund, Crown Impact, on $550 million. The firm spent a year raising the fund, which overshot its $350 million target. It will invest in co-investments, primaries and secondaries in opportunities linked to one of three themes: climate action, inclusive growth and healthcare.
Crown Impact, which is already around 25 percent deployed, is an Article 9 fund under the EU SFDR, meaning it must adhere to the most stringent sustainability-related disclosure standards, as well as having sustainability as its objective.
“Many firms are thinking about what article, and how they are going to implement it, depending on where they are located… which is not always easy,” says Sneyers.
“We have made the choice that going forward we are going to work very hard to ensure that our next generation funds will be classified at least as Article 8, complying with binding E and S criteria and good governance,” says Sneyers. He notes that this was not a difficult decision for LGT, given “we started 20 years ago” integrating environmental and social considerations into investments. “For others, it might be fairly new,” he adds.
Article 8 funds promote sustainability among other objectives and make certain disclosures about sustainability.
As an Article 9 fund, is Crown Impact only able to invest in other Article 9 funds? No, says Sneyers: “We need to make sure first and foremost that the investments, direct or via funds, that we are doing are sustainable. But the funds don’t need to be Article 9… for example, they might be in jurisdictions not subject to SFDR.”
Sneyers cites an example from the firm’s hedge fund investing business, where a hedge fund product is able to maintain Article 8 status because it has look-through and transparency to the underlying positions, so LGT can do the “SFDR work” – making sure provisions are applied relatively independently – irrespective of what the associated managers are reporting.
“Crown Impact is Article 9 because of our investment process and the underlying investment philosophy – it has a clear sustainable investment goal and incorporates our belief in impact investing,” Sneyers says. “Whether the underlying funds are subject to SFDR is not the main criteria.”
In terms of its structure, LGT’s Crown Impact fund looks like the firm’s other private equity programmes. It is targeting private equity rates of return. “The world will need to adress issues facing people and planet in more structural ways,” says Sneyers. “And more capital will need to follow there. Regulation, consumer preferences… all of this will make many sustainable investments and impact deals very attractive from a returns perspective.”
LGT Capital Partners is a separate organisation from Lightrock, an impact fund manager that was created in 2021 from various impact investing units of LGT Group. The two firms have a mutual shareholder: the Princely Family of Liechtenstein.
Crown Impact has completed one secondaries transaction so far, Sneyers tells New Private Markets: a “complex” transaction, in which the fund took over a number of assets in the clean energy space.
Sneyers declines to go into further detail on the specific deal, but notes that secondaries would most likely form the smallest component of the fund’s investment programme. “We don’t want to shut our eyes to opportunity, but as of today it is a small market,” he said. “With time, that segment is definitely going to grow, but it will take a while before it has reached a relevant size.”
The future is outcome-orientation
Institutional investors are becoming more conscious of their impact across the board, says Sneyers. “Outcome orientation is becoming more important,” he continues. “We have come from many years of focusing on ESG process, and that is shifting to ESG outcomes.”
Sneyers points to a survey of LGT Capital Partners’ clients this year that indicated 22 percent now have a dedicated allocation to impact or SDG-aligned strategies, with a further 44 percent intending to create one. When the same question was asked in 2019, only 10 percent had a dedicated allocation.
“We believe this market will grow significantly,” says Sneyers. “We have certain investors who do no longer consider an offering that has no ESG or impact perspective.”