Private market ESG funds to reach €1.2tn as managers wake up to the potential

Oct 12, 2021 | News

The European private markets industry is still in the early stages of transformation, with ESG funds expected to skyrocket in the next four years to €1.2tn in assets, according to a new study by PwC.

Private market ESG assets in the region have already more than doubled in size since 2015, reaching €252.9bn at the end of 2020. PwC believes this will continue to rise to between €775.5bn and €1.2tn by 2025, meaning that Europe will make up between 31% and 35.9% of global ESG private market assets.

‘In this fast-evolving landscape, general partners (GPs) will be increasingly required to adapt along with the winds of change, positioning ESG at the centre of their investment, risk mitigation and alpha creation strategies,’ said Will Jackson-Moore, global private equity, real assets and sovereign funds leader at PwC. ‘Those that successfully harness ESG’s sheer value creation and protection potential stand to secure – or even enhance – their competitive positioning.’

PwC’s EU Private Markets: ESG Reboot report surveyed 200 GPs and 200 limited partners (LPs) representing €46tn in global assets under management.

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Sustainable investing has become mainstream in many parts of the market, but the adoption of ESG in private markets has been lagging. However, in the last year, particularly in the aftermath of the pandemic, investors have been demanding more sustainable investment strategies from their managers.

‘As sustainability becomes increasingly entrenched in societal norms and values, and the investment ecosystem becomes increasingly sensitive to the role it must play in mitigating and alleviating sustainability risks, we believe that the industry is nearing the precipice of a paradigm shift of unparalleled proportions,’ the authors of the PwC report noted.

In addition to new fund launches, the private markets industry has been working to provide more transparent reporting on ESG issues. Last month, The California Public Employees’ Retirement System and global investment firm Carlyle established an LP-GP partnership to streamline the private equity industry’s historically fragmented approach to collecting and reporting ESG data.

ESG as a performance driver

On top of increased investor demand driving the growth of sustainable investing, fund managers have found they can use ESG criteria to increase the value of the businesses they are investing in, bolstering eventual returns.

Within private equity, more than half of the respondents to PwC’s survey said incorporating ESG into the investment cycle boosted exit multiples by 6% to 10%; and 32.1% found that exit multiples were more than 11% higher.

This was even higher in real assets. Almost a quarter of infrastructure GPs expect green infrastructure prices to surpass their non-green equivalents by more than 15%. Almost half of real estate GPs said green buildings fetch premiums of around 6% to 10%, while almost 30% said these can range between 11% and 15%.

Olivier Carré, financial services market leader and sustainability sponsor at PwC Luxembourg, said: ‘GPs are waking up to the fact that ESG provides a strong case for alpha. This is illustrated by the fact that GPs, on average, benefited from a premium of between 6% and 10% following ESG implementation within their investment methodologies.

‘While this is by no means negligible, we strongly believe that GPs with strong ESG skills and focus will not only have better investment performance, but also higher shareholder and stakeholder recognition.’

Source: CityWire

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