Sustainability-linked loans are not for everybody, says AllianzGI

Manager's latest European private credit fund has an ESG component to it, but won't insist on sustainability-linked loans for all its borrowers, says European private credit head Damien Guichard.

Sustainability-linked loans, a common tool for lenders looking to drive ESG improvements among their borrowers, are not suitable for all companies, according to Allianz Global Investors’ European private credit head, Damien Guichard. That is why the manager has retained the option to make conventional loans as part of its ESG credit fund.

European Private Credit III – Invest for Positive Change fund (EPC III) launched in November 2023 with a mandate to lend to businesses from all sectors other than real estate and financial services. It reached a €300 million first close last week, according to a statement.

Unlike the fund’s predecessor, which closed on €494 million in 2022, EPC III has the “extra financial objective” of improving ESG practices among borrowers. In most cases this is expected to involve structuring the loans so that the interest payments are tied to sustainability-related KPIs. However, this will not always be the case, as the firm does not consider all companies ready to meet sufficiently ambitious objectives.

“We want to have a majority of our loans to be structured as sustainability-linked loans, but we don’t need to have 100 percent of the investments done under that type of structure,” Guichard told New Private Markets. “We don’t want to be in a position where we cannot be ambitious enough on the sustainability targets, but want to support companies to get there instead of excluding them.

“We have to recognise that some companies, especially at the smaller end, may not start at a very high level in terms of ESG.”

Sustainability-linked loans have become relatively commonplace since entering the market in 2017. This peaked in 2021, according to a report from Alcentra, when issuances totalled $517 billion. This has fallen in the years since, which may be attributable to the drop in primary bank debt issuance.

In instances where a sustainability-linked loan is not used, AllianzGI will fulfil its ESG improvement obligations by engaging with borrowers by issuing ESG questionnaires, and helping them understand the regulatory landscape. “We think that we are doing our job, which is to accompany companies to improve their ESG standards and engage with them, and explain to them why it’s important,” Guichard said.

A consequence of AllianzGI’s decision is that it must market the fund under Article 8 of the EU Sustainable Finance Disclosure Regulation, rather than Article 9. “If you are Article 9, you need to have 100 percent sustainable investments. This is why we decided to go for Article 8,” Guichard explained.

EPC III’s fundraising target is €750 million, with a €1 billion hard-cap. The firm will write tickets from €20 million to €100 million and above, according to Guichard, and is looking for returns of EURIBOR plus 5.75 percent, which equates to approximately 9 percent overall.

AllianzGI expects to continue fundraising throughout 2024, and potentially into the first few months of 2025.