Side Letter: ESG’s political debate; BPEA’s LP alignment; PE’s job creation

A US conservative association has claimed that pension funds are better off excluding ESG considerations from their investment decisions. Plus: how Baring Private Equity Asia intends to stay aligned with LPs after its upcoming acquisition by EQT and more evidence of PE's contribution to job creation. Here's today's brief, for our valued subscribers only.

Just happened

ESG considerations: accretive to returns? (Source: Getty)

ESG? No thank you
A US conservative association has proposed legislation that would prevent state pensions from incorporating ESG considerations into their investment decisions. The American Legislative Exchange Council yesterday published model policy that would prevent fiduciaries from investing on the basis of a “non-pecuniary factor or factors such as environmental, social or corporate governance”. “Every state employee should have full faith and confidence that their retirement funds are being invested for maximum growth and not being used to promote a political agenda,” said ALEC vice-president of policy Lee Schalk in a statement.

Though returns should indeed be one of, if not the, most important considerations on a fiduciary’s mind, ALEC’s proposition seems to overlook the mounting body of evidence that ESG is first and foremost a driver of value creation, rather than a hindrance. Over three-quarters of private fund leaders, for example, believe a stronger ESG vision and culture will ultimately drive value in their businesses, according to a survey from affiliate title Private Funds CFO earlier this year. A similar proportion of respondents in EY’s 2021 Global Private Equity Divestment Study said they expected to capture an “ESG premium” in businesses they are considering exiting.

It’s worth noting that not every investor is yet convinced that ESG is accretive to returns. According to a February LP survey from Bain & Co, 70 percent of those in Europe agreed or strongly agreed that ESG commitments influence valuation premiums, versus only 38 percent of LPs headquartered in the US held the same opinion. Still, less than 20 percent of LPs globally actually disagreed with that sentiment.

In our view, ignoring ESG issues altogether is clearly a risk. Ruling out ESG considerations could be construed as a dereliction of a fiduciary’s duty to protect pensioners’ investments. The direction of travel is undoubtedly moving one-way when it comes to ESG in the private markets, and that is for good reason.

Staying aligned
As the number of listed PE firms continues to climb, one concern LPs often raise with us is how senior executives at these organisations can ensure they remain aligned with investors after such a massive windfall; even those who receive mostly stock, rather than cash, must surely be more aligned with shareholders rather than LPs, they often posit.

This is a question Private Equity International put to a senior executive at one of PE’s soon-to-be listed entities, Baring Private Equity Asia, which will be acquired by listed giant EQT later this year. In an interview with managing director Kosmo Kalliarekos, published yesterday, we asked: how do you ensure alignment with LPs after a deal like this? The full article, which also spans regulation, IPOs and the duo’s growth plans for Asia, is worth a read, but here’s a snippet from his response:

“Nobody’s doing this for the cash component and, in any case, we have carried interest that would be flowing. Certainly, I’m much more motivated about the value of my stock and how that can grow over time, rather than the cash component that we received… ultimately the best way to deliver long-term sustainable growth of our business is to remain focused on delivering strong performance for our clients.”

You can find the rest of our interview here.

They did the math

You’re hired
PE and VC-backed companies consistently supported employment amid a disruptive 2020, according to trade body Invest Europe’s latest Private Equity at Work report. PE and VC-backed companies employed 9.9 million people across Europe at the end of 2020, creating 2 percent more jobs (net) that year, versus a 1.6 percent contraction in the broader European job market.

Financial services and insurance companies, and biotech and healthcare businesses, recorded the highest employment growth in 2020, 7.7 percent and 7.5 percent, respectively.

Essentials

Nu partnership
Global investment manager Nuveen has partnered with UK charity the Shell Foundation to invest $100 million over five years in climate resilience, climate change mitigation and energy access in emerging markets, affiliate title New Private Markets reports (registration required). The capital will come from Nuveen’s $218 million Global Impact Fund – which closed below target last year – and the firm’s parent organisation, TIAA, a source close to Nuveen told NPM, noting that Nuveen also expects to raise additional third-party capital for this climate mandate.

The Shell Foundation will source investment opportunities for Nuveen, including companies in which the Shell Foundation is already an investor, and may co-invest alongside Nuveen on a deal-by-deal basis. “We can leverage our years of evolved market understanding and capital deployment thesis to enable Nuveen to channel the much-needed institutional growth capital to impact ventures,” Ashish Kumar, climate and innovation lead at Shell Foundation, told NPM. Shell Foundation deploys around $40 million of catalytic capital each year for climate solutions in emerging markets.

SPAC to reality
We’re entering an interesting time for the SPAC world. That’s according to Berkeley Research Group, which notes that many of those formed during the SPAC craze of 2020 and 2021 are yet to make a purchase, meaning the clock is now ticking for them to find and merge with assets, affiliate title Private Funds CFO reports (registration required). According to Kerry Ann Sullivan, a director in Berkeley’s Transaction Advisory practice, a rush to finalise such deals will impact how comprehensively due diligence is conducted. The window for such appraisals is 24 to 48 hours, Sullivan says, making it imperative to uncover potential issues as quickly as possible.


Today’s letter was prepared by Alex Lynn with Carmela MendozaToby Mitchenall and Helen de Beer.