How do you tie carried interest to sustainability? Early trailblazing examples suggest the answer is ‘keep the metrics simple’ and get creative.
European private markets firm Capza will forfeit a slice of its carry to LPs if it doesn’t successfully link the price of the loans it makes to the ESG performance of the borrowers.
Snehal Shah has the full report, but in short: there are two ways in which ESG is being ‘monetized’ here. One is a portfolio-level programme, where Capza’s sixth private debt fund will aim to give “financial benefits” to borrowers that perform well against certain ESG targets. The other is at the fund level, where a slice of Capza’s carry will be forfeited if it doesn’t manage to implement enough of the portfolio-level ESG programme.
Linking a GP’s carried interest share to non-financial outcomes is still rare, even among impact investors. The stumbling block is normally the fact that funds often pursue impact across a number of different areas (such as education, healthcare and climate change). Coming up with a singular measure that balances those types of impact gets pretty sticky. Having one goal in mind – whether it is Capza’s number of loans with an ESG link or EV Private Equity’s goal of a net reduction of 1 million tonnes of CO2 over a 10-year period – makes it doable.
The greening of fund finance
Trend alert! The connection of sustainability to fund finance costs is gathering momemtum. Yesterday morning we brought you details of the subscription credit facility for AlpInvest’s latest co-investment fund. This was the first time we had seen an ESG-linked sub line tied to a co-investment fund; normally we see them attached to control-oriented vehicles. The cost of the facility ratchets up and down depending on how AlpInvest integrates ESG into its own investment processes, rather than on how the underlying portfolio companies are performing.
This morning we see that Investec Bank has structured, in what looks like another first, an ESG-linked NAV loan for London-based energy specialist Bluewater. According to the bank’s press release: “Investec’s Fund Solutions team arranged and underwrote the agreement, structuring it to offer reduced interest payments when specific ESG goals are met, with the cost savings to be ring-fenced for further ESG initiatives.”
The facility is for Bluewater Fund I, which closed on $861 million in 2013, according to affiliate title Private Equity International.
Says Investec: “It was also implemented within a framework that easily allows for additional capital to be committed over time as required. By overlaying an ESG element, the facility aims to encourage Bluewater to further increase their ESG credentials.”
How impact investors measure up
BlueMark is a consultancy that conducts assessments of how impact investors’ processes align with the nine Operating Principles for Impact Management. It has collated findings from its first 30 projects (for clients including Bain Capital, KKR, Partners Group, UBS and Blue Orchard) into this report, which includes a benchmark by which impact investors can measure themselves. Here are BlueMark’s key findings:
- Impact process is “often less robust at later stages of the investment lifecycle”. Investors struggle most to ensure impact endures beyond exit (principle seven) and to consistently adapt their processes based on lessons learned (principle eight).
- Different investor types are strong in different areas. For example, DFIs have better ESG risk management systems, while specialist “impact-only” managers are stronger when it comes to considering impact at exit and learning from reviewing impact performance. Multi-strategy managers, meanwhile, are “less likely to align staff incentive systems with impact performance” (principle two).
- ‘Bigger’ is not necessarily better. Neither is ‘older’. BlueMark found that “neither being a veteran nor a large impact investor equates to having a more sophisticated impact management system”.
Our take: read this report if you want to know what it takes to run a tight impact management ship.
Appeasing LPs: 94 percent of fund managers say incorporating ESG criteria in their investment strategies is important for their LPs, according to BDO’s pulse survey.
Hey, big lender!
CDC, a development finance institution owned by the British government, has committed $100 million in debt to ETG, an agricultural conglomerate connecting smallholder farmers to global markets through its operations in 48 countries worldwide. It’s one of CDC’s largest ever corporate debt investments. “Given CDC’s focus on ESG frameworks, this facility marks a solid achievement for ETG to further strengthen its world class supply chain and mitigate risks in its operations,” said Anish Jain, chief treasury officer of ETG, in a press release. “Including this CDC capital commitment, ETG has one-third of the loan book linked with ESG and sustainability standards.”
LGC hires sustainability lead
Legal & General Capital has found a new head of sustainability in John Alker, who was most recently a director at the non-profit UK Green Building Council and previously worked with the World Wildlife Foundation. LGC, the alternative assets arm of Legal & General, set itself a target last year to enable net-zero carbon emissions for all its new housing stock by 2030. Press release here.
9x home run
Congratulations to Halime Cisse, the Malian woman who gave birth to nine babies last week in Casablanca at a clinic owned by a Mediterrania Capital Partners’ portfolio company Akdital Holdings. “Our job as private equity
investors can’t receive a higher reward than seeing how the medical staff at Akdital’s clinics, assisted by the most advanced technologies, are saving lives every day,” said Mediterrania’s CEO Albert Alsina in a statement.