At a public meeting of the Minnesota State Board of Investment in August, a citizens group asked the pension’s board not to invest with secondaries specialist Landmark Partners because of its connection to residential real estate manager Pretium Partners.

Pretium owns a single-family rental provider that has been criticised for mismanagement. This, its critics allege, has led to higher costs and health impairments in tenants, and primarily in people of colour.

Pension funds have been taking ESG matters into account when considering fund commitments for years now, with Chicago Teachers’ Pension Fund’s decision in 2018 to refrain from infrastructure fund commitments with two prominent managers a notable example. The difference in the Minnesota case is that it is a pension fund being lobbied by its own beneficiaries on ESG matters, rather than the pension actioning its own ESG policies.

Putting ESG factors at the heart of investment decision-making is increasingly important for LPs, according to David Korngold, head of the financial services group at ESG consultancy BSR. Although Korngold’s firm has seen increased ambition around ESG on the part of LPs and GPs, he tells affiliate title Private Equity International there needs to be “action and accountability” to support that rhetoric, which will necessitate hard choices.

In Minnesota’s case, there is an argument to be made that optics, rather than economics, could be at play. Landmark’s parent company Ares Management partnered with Pretium in 2020 to acquire the allegedly problematic housing provider Front Yard Residential and its subsidiary HavenBrook Homes – an investment that took place before the Landmark acquisition. Furthermore, Pretium holds the asset in a separate pool of capital from the fund in which Landmark became an LP via a 2019 restructuring process.

Landmark and Minnesota SBI have no direct economic exposure to the asset in question. So does complying with the citizens group’s request risk Minnesota losing out on potential lucrative returns?

When it comes to ESG issues, the stakes are understandably high. The increased focus on and demand for these considerations mean a gold standard in the private markets industry for evaluating ESG issues is more important than ever.

As placement agent and advisory firm Rede Partners noted in an August report on predictions for the next decade of private equity, GPs will need to be on the front foot with their corporate body language when it comes to sustainability and ethics. “GPs generally will have to be on the right side of public opinion,” Rede noted.

It is unclear whether Minnesota ultimately decided not to re-up in with Landmark and a spokesperson for the pension did not return requests for comment. In any event, this latest case highlights the reality that even the most tenuous connection to perceived poor ESG standards can potentially affect investment decision making.

Write to the author: michael.b@peimedia.com