Notes from a placement agent
New Private Market‘s Snehal Shah recently caught up with Campbell Lutyens fundraiser Paula Langton for a quick-fire, wide-ranging download on the state of sustainability and fundraising. Here are the key takeaways:
- The number of funds with carry linked to impact is on the up: “We saw fewer than five funds with this in 2019, but it’s about 15 to 20 GPs now.”
LPs are starting to get very specific in their diligence around climate risk, with “questionnaires around the TCFD, net zero emissions, Scope I, II and III”.
- GPs are occasionally rejecting LPs based on misaligned values relating to ESG (such as when investors come from countries with repressive regimes). “And we have seen some sustainability or climate managers consider whether the revenues of the capital provider has come from carbon emitting industries.”
- “We wouldn’t raise an old-world oil and gas fund – and frankly, investors have shown they wouldn’t either.” However, it’s a different story for a former oil and gas teams that can demonstrate a commitment to energy transition and green solutions.
Frameworks: Season to taste
PRI, SDGs, TCFD, SASB, GRESB. With so many frameworks available, GPs are wondering which ones are worth their time, which ones aren’t, or whether they even need bother at all. After interviewing 10 managers here’s some headlines:
- Non-standard: At this point in time there appears to be no gold-standard. While our sample of leading firms seems to be coalescing around some guidelines for reporting or due diligence, there is no singular LP-approved “right way of doing things”.
- Consolidation please: Among the most common refrains about ESG reporting we hear from GPs is a need for a consolidation of the frameworks. From their view, overlapping requirements waste time.
- Relevance: While some reporting standards, such as the UNPRI, have garnered widespread uptake from private market participants, other frameworks are viewed as too narrow in scope for some.
- House rules: A handful of larger GPs are trying to bypass the expectation of a long list of ESG framework credentials by strengthening their own team’s reporting policies. The risk they’re taking is that investors may seek third-party validation.
The ESG premium
The notion that robust ESG practice makes – rather than costs – money seems to be gaining traction.
Nearly three-quarters of respondents to a survey by consultancy EY say they expect to capture an “ESG premium” in businesses they are considering exiting. In the firm’s 2021 Global Private Equity Divestment Study more than half of PE firm respondents said they would generate increased value on exit through instilling portfolio company social policies, such as those around diversity and equality, and by courting buyers with a “strong ESG track record”.
“GPs are creating value in their companies via ESG initiatives and expect to capture some of that premium on the sale,” said EY’s Pete Witte. “When you are in an environment like we are in right now – where valuations are very high – you really have to execute to perfection on all of these traditional measures of value creation and have additional levers like ESG in place.”
Steers towards impact
INCYMI, we reported on Wednesday that Helen Steers, Pantheon partner and former BVCA chair, has joined Zamo Capital. Zamo (raison d’etre: invest in impact-focused GPs) is building up a bench of experienced private markets players. Steers joins founder Jim Roth, Abrdn’s Merrick McKay, former MS AIP head Neil Harper and others. Steers sits as an external member of Zamo’s investment committee.