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GPs are translating ESG into fundraising and exits

ESG has gone from a ‘nice to have’ to a fundamental differentiator in a crowded fundraising market, according to a new survey.

  • Nine out of 10 GPs believe ESG record will drive LP commitments
  • Portfolio companies with good ESG practice expected to have 10% exit premium
  • There is a link between more diverse managers and larger fund size targets

ESG has gone from a ‘nice to have’ to a fundamental differentiator in a crowded fundraising market, according to a new survey

Investec’s 12th annual GP Trends Survey, which took place between June and August 2022, showed that the vast majority (90%) of more than 150 GPs believe that their ESG credentials will influence the likelihood of LPs committing capital to their funds, with 40% of the 90% expecting it to matter to a ‘great extent’.

There has also been a marked shift on the deployment side: companies with good ESG procedures in place now expect to price at premiums of 10% or more at exit, according to GPs surveyed. At the same time, 62% said ESG has been a significant contributor to a decision not to invest in a company.

The GPs most optimistic about their fundraising – those expecting to raise larger new funds – are also the ones embracing ESG-linked debt facilities, which can either increase or decrease the costs on borrowings depending on pre-agreed ESG performance indicators, such as carbon emission reduction or diversity targets. This year’s survey also highlights the increasingly formalised and embedded nature of ESG reporting, with 48% of firms having a board level review in place to report KPIs for ESG-linked debt facilities. Further, 30% now bring in external auditors to review compliance with ESG-linked KPIs.

Interestingly, a bifurcation has begun to emerge with the majority (53%) of firms that expect to grow their funds reporting on ESG debt KPIs at board level. By contrast, among those who expect their funds to remain flat, the figure is just 29%.

The survey also found early signs that GP efforts to improve diversity were positively impacting staff retention and optimism about fundraising.

Over half (55%) of GPs confident about raising larger successor funds have recruited a female partner in the last year. By contrast, the figure is just 21% at firms that expect their fundraising to be flat.

Additionally, the survey found that 29% of managers expecting to raise larger funds have hired partners from minority ethnic backgrounds, compared to just 17% among those whose future fundraising is expected to be flat. It is worth noting that their confidence may not result in an increase in size or speed of funds raised. Their moves are also not representative of the wider GP market: only a fifth of firms surveyed have hired a partner from an ethnic minority background in the last 12 months and only 35% have hired a female partner within the same timeframe.

Key Takeaway | PE firms with credible ESG track records are confident they can raise larger funds by appealing to LPs


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