A sharp rise in ESG-linked fund financing topped by a €2.3bn sustainability-linked loan for Sweden’s EQT shows that private equity firms are future-proofing portfolio companies to protect their returns, and highlights a potentially lucrative stream of new deals for banks.
EQT’s fund financing can top out at €5bn and raises the bar for the private equity sector as the biggest ESG-linked fund bridge facility. It follows a deal for KKR’s Global Impact Fund earlier last week, which was the first US fund financing.
It is a bold move designed to drive change throughout the companies that EQT owns by linking pricing on the sustainability-linked loan to the performance of EQT’s future portfolio companies.
"This is a game-changing moment for EQT, but also for the private equity industry,” said Per Franzen, partner and co-head of EQT’s private equity advisory team.
Pricing on the loan is tied to whether EQT’s portfolio companies hit key performance indicators. Aggregated results will drive improved pricing on the bridge facility, creating a virtuous circle, where better ESG progress lowers capital costs and improves resilience.
EQT has selected three KPIs, for gender equality, renewable energy transition and governance, which fit the firm’s focus on biodiversity, climate and social responsibility.
The firm has €40bn of assets under management across 19 active funds in private capital, real assets and credit.
“We are driving beta actions, where we want to increase the ESG hygiene level overall in the portfolio because the market needs to reach a new level,” said Therese Lennehag, head of sustainability at EQT. "Then we dive in to each of EQT’s portfolio companies and work with the things that will create alpha value specific to their industry, operations and value proposition."
EQT has a 10-year track record in ESG, which puts it at the forefront of ESG adoption in the private equity industry. The firm was also an early signatory to the UN’s Principles of Responsible Investing.
The financing is being provided by a syndicate of 17 global banks, including BNP Paribas and SEB as sustainability coordinators. BNP Paribas is also facility agent and sustainability agent.
"Private equity firms realise they can play a role in furthering the sustainable finance agenda, and incorporating ESG in fund financing facilities is a demonstration of this,” said Alexandra Basirov, global head of sustainable finance, FIC at BNP Paribas.
EQT is well capitalised after its IPO in September 2019 and opted to focus on its portfolio companies to maximise social change and generate valuable data.
“We see this fund facility as the most suitable and interesting opportunity at this stage to insert ESG into the heart of the value proposition for our clients and accelerate a system transformation,” Lennehag said.
Fund financings are used to improve private equity firms’ returns by bridging capital commitments from limited partners. Two types of fund financing deals linked to ESG commitments are emerging, in line with similar developments in the loan and bond markets.
Deals that focus on "use of proceeds" are earmarked for specific projects, whereas sustainability-linked deals tie the cost of capital to firms’ progress on ESG targets outlined in corporate CSR strategies aligned with the UN’s Sustainable Development Goals and Paris climate targets.
KKR’s recent deal was a use of proceeds fund financing, along with another €80m deal for an unnamed global private equity firm in late May. Both deals were arranged by Standard Chartered.
French PE shop Eurazeo also completed a €1.5bn SLL fund financing in January that linked to carbon neutrality at the corporate level, and sustainability governance for its portfolio companies.