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More than half of European LP have rejected private equity fund commitment on ESG grounds: Coller Capital Barometer

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European LPs are leading the way in demanding private equity houses consider ESG when raising their investment funds, the latest Coller Capital Global Private Equity Barometer shows.

It said the proportion of European LPs rejecting commitments on ESG grounds had grown significantlt over the past five years, rising from a third of investors to well over half.

North American and Asia-Pacific LPs have not been so forthright, however, with about 25% of the former and a third of the latter having rejected commitments on ESG grounds – a picture that has remained fairly stable since the end of 2016.

European LPs are also more pessimistic about the likely effectiveness of anti-greenwashing regulation, the barometer revealed.

Well over half of North American and Asia-Pacific investors think such regulation will make it easier for them to distinguish true environmental claims from false or misleading ones over the next three years. Only two fifths of European LPs share this confidence.

The pension funds, insurance companies, and asset managers that make up the bulk of the industry’s backers believe strongly in the private equity model – almost 90% of LPs think that most small and mid-cap public companies would benefit from periods of private equity ownership as they grow, according to the report.

And a large majority of LPs also see private equity sponsorship as a positive indicator in assessing the short-to-medium-term prospects of private companies seeking to IPO.

However, LPs also think the industry needs to evolve. The majority of LPs think that a policy of simply staying within the law is no longer enough and that societal pressure will force the industry to begin self-regulating.

Coller Capital chief investment officer Jeremy Coller said, “The days when private equity flew under the radar have gone.

“The industry is now simply too big for society to ignore. Like it or not, private markets are becoming less private – and we need to decide how to respond.”

LPs foresee increased regulation for private markets. A majority expect an increase in regulation outside their home market – and half of North American LPs expect more regulation in their domestic market.

Almost half of the LPs responding to Coller’s survey said that incentivising a larger proportion of portfolio company employees would lead to higher investment returns, while a mere 6% thought that broadening the incentivisation of portfolio company staff would be detrimental to returns.

The report also added that investors recognise that continuation funds are a ‘game changer’ for private markets.

It said, “While a majority of LPs believe their principal effect will be to strengthen the private markets ecosystem, a sizable minority believe they may undermine private equity’s traditional 10-year-fund model.

“Having said that, investors generally regard continuation funds as a positive development – two thirds of LPs believe they are likely to prove good owners of portfolio companies.”

LP appetite for co-investing is another area that shows no sign of slowing – over half of LPs say they are taking steps to improve their attractiveness as co-investment partners, according to the report.

Almost all of these LPs are trying to increase their speed of decision-making, and around half are looking at other ways of making themselves more attractive.

Coller said that the pandemic has also brought about lasting changes in the way investors conduct due diligence.

Over the last 18 months, approaching half of North American and European LPs made first-time commitments to GPs whom they had never met face-to-face – and around a third of Western LPs say they are likely to do the same in the next 18 months. The latter proportion rises to 50% for Asia-Pacific investors.

Coller said, “However, this does not mean that investor due diligence is becoming less personal. Two thirds of LPs say they are already checking the social media accounts of individual GP team members or have plans to do so.

“Cybersecurity is also front of mind for LPs. Almost a tenth say they have already suffered cybersecurity attacks (a proportion that has almost doubled since the Barometer of Summer 2017).

“And two thirds of LPs think an attack on their organisations is likely within the next five years.

“Investors will respond to these higher risks in their portfolios too. Almost three quarters of LPs plan to ask for cybersecurity risk assessments of their GPs’ management companies in the next few years and half expect to demand the same for portfolio companies.”

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