On secondaries and ESG

Acquiring fund stakes or asset portfolios secondhand can make it challenging to impact ESG – can secondaries firms do more?

In primary markets, attention to environmental, social and governance (ESG) issues has become increasingly material for fund managers to drive returns (not to mention meet many LPs’ responsible investment expectations).

So this week I decided to ask secondaries managers about their ESG practices and had a number of discussions with professionals in Europe and the States.

Some of those conversations were pretty short, though.

While a number of secondaries buyers do have broad ESG policies in place – including StepStone and Hamilton Lane  – they are typically inheriting positions in funds whose managers have long stopped negotiating with LPs on the particulars of how that fund’s capital gets invested. It can therefore be difficult to push a new or enhanced ESG agenda down to the underlying manager(s) and, ultimately, portfolio companies.

One Europe-based secondaries GP highlighted the complexities involved in buying portfolios of fund stakes or multiple assets in one go – trying to further cherry-pick items that only meet a buyer’s ESG requirements complicates things even further (and could potentially cause the seller to move on).

Most of the people I spoke to on background shared similar sentiments. But an ESG-focused advisor I spoke with, Andrew Malk, challenged that type of resigned stance: “For all the reasons a primary investor would look at ESG issues, secondary investors should, too. They’re buying interest in these companies; why should it matter how they got into it?”

Things are of course a bit more straightforward for the direct secondaries-focused firms, like Nordic-based Verdane Capital. “We are active owners, so our approach must be quite similar to that of primary GPs,” Verdane’s director of investor relations, Frida Einarson, told me. (Look out for a Q&A with Einarson next week exploring the firm’s ESG initiatives in greater depth.).

What’s your view? Can secondaries firms do more with ESG? Drop me a line or comment below.