With growing demand from LPs for environmental, social and governance data and an increasingly competitive private equity market, GPs that are not already actively tracking ESG data may find that when they start, they are already having an impact without deviating from their existing investment theses, Anne Anquillare, co-founder and chief executive of fund administrator PEF Services, told Private Equity International.
How could fund managers already have an ESG impact without knowing?
As the awareness [of ESG] grew with risks and opportunities associated with those issues, so did the understanding that, as a mid-market private equity buyout or real estate fund, I may already be an impact fund, just not capturing the data to show that. Fund managers always just viewed it as more, ‘we do this as part of our due diligence, we just want to make sure we’re investing in companies we’re proud to be a part of.’
As we started capturing data, the story unfolded, and it turns out, they are impactful funds. They are investing in companies that are dramatically growing their employee base, that tend to be more diverse than most Fortune 500 companies, that have more diverse boards and management teams and that invest in secondary and tertiary locations. These smaller funds are in the lower-cost areas with lower-cost businesses that need patient capital investing [there]. This capital is important to those areas, not centred on San Francisco, New York or Boston, but rather Kansas City, Minneapolis and the likes.
So we tell our mid-market clients that there’s a high likelihood there’s impact inside your investments, you just have to make it known by capturing the right ESG data. And let investors know you’re involved in this space already.
How do those fund investors view impact investing?
When we told our clients about tracking data, we did get more traction with funds that have European investors. With the UN directive [on Principles for Responsible Investment], Europe was quicker than the US to adopt those principles, and any fund that has European investors has heard of this.
With FATCA [Foreign Account Tax Compliance Act] it has been difficult for the flow of funds between Europe and the US, so the US mid-market funds have been interrupted because of that. But Europe is trying to figure out this unintended consequence, and as that flow regains that volume, we think more US-based funds will start thinking about and capturing data in order to show themselves as impactful investors [to draw in European investors].
How can fund managers capture ESG data?
What we’re promoting is: do what you do well, look for companies you do well with, and just capture the ESG data because that will tell the story on its own. You don’t want to take them outside of their track record.
There’s no set definition of impact investing, and I don’t know if there even needs to be one, because things are constantly changing over time. However, standardisation should come into play in regards to how the data is collected. That’s where we’re starting to see commercial products for calculating carbon footprint, for example.
GPs who are savvy enough can use this dataset to differentiate themselves from a lot of people trying to raise money in private equity right now. There are many, many fund managers who’ve yet to start capturing this data. This is the type of information you want to track real-time. If you try to track it historically, that’s a monumental effort. But it’s never too late to start now; better late than never.