Delilah Rothenberg

An uncomfortable conversation

Current investment management practice – even when it is ESG- or impact-flavoured – contributes to systemic social injustice and long-term investment risk.

That’s the view put forward by The Predistribution Initiative, a project started in 2019 that seeks to move thinking about responsible investment forward, so it encompasses not just portfolio company activities, but also the more fundamental elements of investment structures and asset allocation.

In other words: current ESG and impact discussions dwell mainly on how, for example, a private equity-owned company might be encouraged to improve its culture of safety or reduce carbon emissions. The Predistribution Initiative, meanwhile, highlights how an investment model that relies, say, on high levels of corporate debt, or one that concentrates wealth among a small number of individuals at investment management firms, is introducing longer term instability into the system.

In its latest paper, ESG 2.0: Measuring and Managing Investor Risks Beyond the Enterprise-Level, the Predistribution Initiative examines how increased corporate indebtedness – and the short-term incentive for asset owners to allocate assets to higher risk strategies – is creating vulnerability in the real economy. It is also flowing capital towards a smaller number of ever-larger funds – in the hands of a smaller number of firms – which gets invested into larger companies.

This in turn creates “monopsony dynamics”, at the same time squeezing out “diverse and emerging fund managers, as well as innovative and potentially more regenerative investment structures”. The concentration of wealth among successful private equity managers, notes the report, contributes to inequality “as well as disproportionate influence of the largest fund managers over their investors, stakeholders and public policy”.

The work of the Predistribution Initiative essentially involves taking the ESG discussion – one that the private markets ecosystem is just starting to get comfortable with – and pushing it into uncomfortable new spaces. Its founder and executive director, Delilah Rothenberg, tells me there is “a real fear” when it comes to opening up a conversation about such issues. Perhaps this fear stems partly from an idea that these issues are not easily addressed in such a way that doesn’t fundamentally undermine the private equity model.

And yet, the paper – which invites stakeholders of all stripes to come forward to collaborate – does offer up 11 areas in which action can be taken to create a more stable system (and they don’t involve the extinction of the buyout).

When I suggest to Rothenberg, whose career has spanned private equity, investment banking and consulting, that these are the ESG issues we might be discussing at conferences in three or four years’ time, she points to the rising enthusiasm for employee ownership as evidence that they are actually being considered already.

Hire calling

If you are a GP, then hiring an ESG or sustainability chief may well be on the to-do list. This in-depth article by Nathan Williams guides would-be recruiters through a market in which the supply-demand imbalance is pushing those hiring to look outside the conventional pools. Don’t have time to read the full version? Here are some key points:

The brief is changing from “mid-manager level” candidates that can “do good risk analysis” to more demand for people who can plug into portfolio companies at a senior level and effect change.

  • Greenwashing is not just a risk among organisations. Says Helen Pradas-Page at specialist ESG recruiter Acre Resources: “There has been an explosion of role types and specialisms so it’s hard to navigate from someone’s LinkedIn profile to determine what their particular role and expertise is. If you’re not familiar with the talent pool everyone can look like an ESG specialist.”
  • The lack of an established private markets ESG talent pool is leading many to tap the world of consultancy for talent.
  • Think about where the new hire/team sits in the organisation and don’t be tempted to have it sit by itself, because “it requires this individual to build relationships with the investment team, LPs, the portfolio management team”, says Kate Goodall at specialist headhunting firm Private Equity Recruitment.
  • To compete for the best talent, the role needs to include scope for the recruit to make an impact. This means seniority and access to – or a seat on – the IC.
  • Be ready to part with around £100k ($140k; €115k) per annum to make your first ESG hire, says one UK-based source. Says Goodall: “It needs to be important and integral to the business. You can’t go in cheap.”

Eurazeo ships impact fund

In case you missed it, we brought you news this morning that Paris-listed firm Eurazeo has started raising its first fund categorised as “Article 9” under EU law. “Article 9” is the darkest green you can get in the language of EU law: funds must promote a particular environmental or social objective, and report on progress to investors. Eurazeo’s private credit fund will make investments that help lower carbon emissions from the shipping industry.

Conflab with KKR 

Tomorrow I’ll will be in conversation with KKR’s impact co-head Ken Mehlman as part of PEI’s CFO All Access series. On the agenda: ESG and the future firm. I’m looking forward to asking Mehlman about some of the less fashionable areas of ESG – as surfaced by the Predistribution Initiative above – and getting a sense of where ESG is heading on issues like tying comp to impact and the role of the regulator.

Message me on if you have any burning questions.
Learn more about CFO All Access here
Read Mehlman’s article co-authored with colleague Robert Antablin on how the UN SDGs are helping guide investors to create a more resilient world.

On the BlackRock-Temasek tie-up 

BlackRock and Temasek teamed up to launch a series of decarbonisation funds, they announced last week. The first fund has a fundraising target of $1 billion and BlackRock and Temasek have jointly committed $600 million to it. Here’s a few additional details:

  • Returns profile: Temasek CEO Dilhan Pillay told Bloomberg they’re aiming for 20 percent IRR. “We’re not going to look at sacrificing returns, but we may have to wait for a longer period,” said Pillay.
  • Where will they invest? They haven’t decided yet, and they aren’t inclined towards developed or emerging markets or particular regions, according to sources. But they’ll invest in industries like emerging and renewable fuel sources, grid solutions, battery storage, and electric and autonomous vehicle technologies, and may consider biodiversity.
  • Who’s in charge and who’s on the team? The funds will be managed by BlackRock through a separate vehicle. BlackRock will bring some Temasek people onboard, move people internally and hire new, external talent to manage the funds. The investment committee will be made up of individuals from both sides.