January 2022. Russia has yet to invade Ukraine. The era of cheap money continues. Nearly two years of coronavirus pandemic has upended working practices and forced supply chain rethinks. Against this backdrop, New Private Markets made some predictions for the year ahead. Did they come true?
We said: “Natural capital will become a mainstream proposition”
What happened: A number of players emerged with natural capital investment propositions or ‘tooled up’ with acquisitions or platform launches to position themselves for the coming revolution. BNP Paribas Asset Management bought a Danish natural capital business in a bid to meet the needs of “investors who are increasing allocations to sustainable private investment strategies”. Bregal Investments placed natural capital at the heart of its impact investment efforts, while Schroders, AXA IM Alts and Manulife all made recent moves in the budding area.
Did it become a “mainstream proposition”? That might be stretching it. Macquarie’s head of agriculture and natural assets Elizabeth O’Leary told affiliate title Agri Investor in October (registration or subscription required) that she is not seeing “material allocations made” by institutional investors, but she expects to them to be soon.
Verdict: Nearly right
We said: “GPs and LPs will focus more on human rights”
What happened: Human rights is definitely on the private markets sustainability agenda, but it remains more of a talking point than an action point. At PEI Group’s Responsible Investment Forum 2022: Europe in November, the issue of human rights was the subject of one panel discussion towards the end of the event – perhaps a reflection of its position on the industry’s priority list. “While it is a growing concern, it’s often not front and centre,” said panellist Kate McKeon, director and head of sustainability at InfraRed Capital Partners.
It is set to gather momentum, however. The PRI is working on a framework that would give investors a “level of support on human rights that they haven’t had before”, said Simon Whistler, the PRI’s head of real assets, at the same event. As Thoma Bravo’s head of ESG, writes for us this month, “the topic of human rights has been garnering more attention in the software and technology space”. Thoma Bravo will be working with peers in 2023 in the PRI private equity group to “share information and develop potential solutions”.
Verdict: We were too early with this one
We said: “Tax justice will rise up the ESG agenda”
What happened: Tax justice – the issue of fund managers and portfolio companies paying fair amounts of tax and transparency around this – featured little in ESG discourse in 2022. Law firm Travers Smith’s Elena Rowlands, writing for New Private Markets in May, argued that tax should be an element of ESG. But we didn’t note any investors or managers taking any action on it.
However, broader issues of inequality have piqued the interest of some sustainability professionals. In June Tim Barlow, managing director at CPP Investments, told the PERE ESG & Impact Forum that there is a “huge amount of social discontent that will need to be tackled”. In the same month Robert Eccles, chair of KKR’s Sustainability Expert Advisory Council, wrote that “while not quite yet in the spotlight, but where much work is going on, is the issue of income inequality”. Later in the year KKR’s head of impact, Ken Mehlman, said at the Global Impact Investing Network’s 2022 investor forum in October that employee ownership initiatives “address inequality in today’s world. A lot of folks, including most of us in this room, have access to the stock market and a lot of wage workers don’t.”
Verdict: Prediction fail
We said: “ESG metrics will go beyond credit facilities”
What happened: Having learned of one manager that was using banking products (foreign exchange hedging and inflation swaps) with costs linked to ESG performance, we predicted more innovation in this vein. While we didn’t see other firms taking the same approach, we did see wider adoption of sustainability-linked loans at both the fund and asset level. European private equity heavyweight Cinven secured its first SLL: a €4 billion facility. Infrastructure manager Actis broke ground in securing a $1.2 billion facility with use-of-proceeds element.
On the supply-side, we saw private debt managers embrace sustainability-linked loans in their investment activity. Partners Group has started offering ESG margin ratchets on all its loans; Barings agreed its first sustainability-linked loan against European real estate; Carlyle started systematically offering decarbonisation-related discounts on its loans. SLLs even began to proliferate in the lower mid-market, Muzinich & Co told us.
Verdict: Innovation, but not as we thought
We said: “LPs will take a thematic approach”
What happened: We predicted that as the definition of ‘impact’ evolves, institutional investors will focus on specific sustainability themes – with climate being the largest – and allocate capital to specialist managers in these spaces, regardless of whether they call themselves impact funds. Several asset owners have allocated capital specifically to address the climate crisis in the past year. Among them are the Ontario Teachers Pension Plan and Border To Coast Pension Partnership.
In terms of other sectors, the Sadel family office created a £300 million fund for food supply chain resilience. In May Singaporean investor Temasek told us it was targeting its impact dollars towards “social SDGs” (think healthcare, financial inclusion and education) in emerging markets and the Guy’s & St Thomas’ Foundation, a hospital endowment, told us it would invest its newly expanded impact allocation to “funds focusing on health and its social determinants”.
Verdict: Thematic LPs abounded
We said: “A record fundraising year”
What happened: We witnessed some massive, landmark sustainability-focused funds closed by the likes of TPG, Brookfield, Summa Equity and General Atlantic as well as a slew of fund launches and closes. While we can’t yet report reliable whole-of-market fundraising data (more on this from New Private Markets later in 2023), our Impact 30 list provides a lens through which to view activity. When we ran the numbers for the most recent edition – which counted funds closed by the end of March 2022 – the 20 largest managers of private markets impact capital had a five-year fundraising total of $76 billion, $23 billion more than the equivalent figure for the previous edition, which counted closes up to the end of July 2021.
This was the year that the mood music for wider private markets turned from frenetic to downbeat. Even so, we’d contend that when the private markets record books are written, 2022 will go down as a record-breaker.
Verdict: Prediction success (probably)