Sustainable funds have a ‘way in’ to a packed 2022 fundraising schedule

Private markets capital is being sucked up by established managers, but LPs are making room for one type of first-time fund: the sustainable one.

Small green door

In a gangbusting private markets fundraising environment, established managers are accounting for a lot of investor capital.

In private debt, for example, the amount of capital raised this year is tracking on par with the pre-pandemic years of 2018 and 2019. However, the number of funds raised dropped from 264 in 2020 to 160 this year, according to data from affiliate publication Private Debt Investor. More capital is going to fewer managers.

Private markets firm Hamilton Lane says it counts 15 managers that intend to raise private equity funds of at least $15 billion in size in 2022, with some looking for as much as $30 billion.

“If those 15 managers only raise $15 billion, we will already be at 55 percent of all buyout fundraising in 2020,” said managing director Carolin Blank at an event in early December.

With established managers dominating LPs’ time and capital allocations, the environment is not easy for emerging managers, say placement agents.

“If we think about the fundraising market for the next six months, a lot of investors are just full,” says Paula Langton, partner at Campbell Lutyens. “We’ve seen the large cap space come back and […] suck out the market for time and attention and capital.”

“First-time funds generally had a hard time during the pandemic, with the flight to quality and to established managers,” Julian Pearson, founding partner of placement firm FirstPoint, tells New Private Markets. “Re-ups consumed much of the capital.”

However, there is one type of debut fund that continues to get its foot in the door.

“Sustainability is one of the few new areas they will continue to deploy to,” says Langton. “We’ve still seen funds raised – and raised quickly – in this particular area.”

Pearson agrees: “We were able to get several first-time funds in the impact space off the ground, and that was very encouraging. I think that will continue at speed throughout 2022.”

First-time funds

Among the successful debutants this year have been Revaia, Trill Impact, Lightrock and Climate Adaptive Infrastructure, while firms such as Spring Lane, Five Seasons and Energy Impact Partners have successfully attracted capital for second funds.

Langton qualifies the point about investor demand, noting it is still centred in Europe. “What that means practically for us is that generally certain European pools are the ones we are going to with most of the sustainability products, obviously with some exciting exceptions, whether that be in Japan, Australia or Singapore.”

Investors continue to allocate to impact strategies – in particular to climate-focused strategies – through their conventional asset buckets. “What often happens,” says Langton, “is you have a sustainability specialist or specialists that sit across a number of asset classes. But where they allocate from are still the traditional buckets”.

This is echoed by FirstPoint’s Pearson: “You see certain individuals become the sustainability lead. They might analyse the impact or climate credentials, regardless of whether it’s infrastructure or tech.”

The rise of climate-focused funds will continue, says Langton, who reports seeing a new climate fund being put together “each week”. Across asset classes, Campbell Lutyens calculates that private fund managers are currently raising $183 billion to invest in climate solutions.

Beyond this, Langton points to the emergence of natural capital as a fundraising trend to watch in 2022. Access to natural capital assets will likely draw new types of investors into private funds.

“I think it’s a space [in which] we will see more non-traditional sources coming into our market: more corporates with net-zero strategies, who have hundreds of millions or more to spend on finding solutions,” says Langton.

To date, corporates have tended to invest capital directly into natural capital projects in conjunction with consultants. As they need to put money to work at scale: “We’ll see more corporates coming into natural capital solutions, or private markets climate strategies in general.” says Langton.