The need for an environmental, social and governance guru at a direct investing private equity firm is clear. You can look at an asset – whether you own it yet or not – and make a call as to what ESG risks need to be managed; and what value creation opportunities exist around sustainability.
The same role at a secondaries firm has a less obvious remit. You are presented with a potential acquisition of a portfolio of fund stakes with underlying companies numbering in the hundreds. It’s a different proposition altogether.
LGT Capital Partners’ secondaries partner Martha Heitmann shed some light on that proposition in a Q&A this week. The firm, she says, always performs bottom-up research on underlying companies and “if the transaction comprises multiple funds, which are often mature portfolios that are partially or fully invested, this can at times add considerable extra work compared to a single primary fund ESG due diligence”. It sounds like a lot of work.
The firm then leans on its existing ESG analysis carried out by its primaries team on the manager itself, evaluating the manager’s ESG practices “in an institutionalised, systematic way”.
LGT, it is fair to say, is a leading voice on ESG. Its managing partner Tycho Sneyers is one of three “non asset owners” to sit on the board for UN Principles for Responsible Investment board, and it publishes an annual report aggregating data from 304 of its general partners on their ESG policies.
So can an ESG red flag from a single portfolio company scupper a secondaries deal? It is possible, but unlikely. The buyer would sooner carve out a specific line item or find a solution with the particular GP (like opting out of that one company) before walking away from a transaction, says Heitmann.
One key takeaway from the conversation: secondaries transactions often have short deadlines with limited time for due diligence compared to primary investments, says Heitmann. If managers within the portfolio already have robust ESG standards in place, buyers will face fewer hurdles in acquiring them.
Something for sellers to bear in mind.
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