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Actis on how ESG took over the world, and the biggest fundraising ‘deal breaker’ for LPs

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ESG investing is no new concept, but it has certainly exploded in importance over the past few years. The market grew to $715bn last year according to the Global Impact Investing Network, while market participants have also expanded in terms of numbers, knowledge and ideas. Neil Brown, partner and head of the investor development group at emerging markets dealmaking major Actis, talked to AltAssets about the surge in LP interest in ESG credentials he witnessed amid the $4.7bn final close of the firm’s Energy 5 fund last month. 

“We don’t market ourselves as an impact fund,” says Actis partner Neil Brown. “We believe that it is very sensible commercially to do things the right way because it delivers value to our investors. If I ask if you want to buy my impact product A, by inference it would mean my other products are not sustainable. But ESG is in our DNA,” he explained. 

Brown spoke to AltAssets in the wake of Actis soaring to $6bn of capital for its latest energy-focused strategy, through $4.7bn for Actis Energy 5 and the remainder via co-investment commitments. Brown said he was happy with the close as it beat the firm’s initial target of $4bn, against the backdrop of launching it in the middle of the pandemic. But he was also quick to note that the firm did not term Actis Energy 5 as an impact fund. 

Actis already boasted an in-house team of ESG people at the time of its 2004 spin-out from CDC, and has seen LP appetite for ESG-committed strategies soar since. Having experience first-hand the sustainable investing market as an investor relations head, one main difference Brown identified between the new fund and the Energy 4 raise from 2017 was LPs’ focuses on sustainability. “A large portion of the fund is around energy transition and renewable horizon, that is something the LPs are more interested at the moment,” he said. “The quality and the number of questions on sustainability we get now is much, much higher than what we got in 2017. Pretty much every LP had something to ask about sustainability and ESG.” 

He described LPs as “getting smarter just like everyone else”, and said they had gained knowledge and perspective on sustainable investing as the market matures. From his observations, when LPs make the call of capital deployment, they usually start with the investment proposition and thesis, then look at the team and the track record. But what makes or breaks it is the operational due diligence. “LPs in general are more focused on operational due diligence, like how you manage their money. There is much more interest now in the market and they do deeper research on that,” he said. “And it is the deal breaker. It is usually a binary decision, if they find a red flag that they don’t understand, then often that means they could walk away.” 

Transparency, he believes, is the way to respond. Brown said Actis has always been relatively transparent with LPs about how they plan to manage their money. One way to do it is to bring in the Actis execs involved to answer questions, something they brought to Zoom for the Energy 5 raise. He said the COO, the general counsel and the head of compliance were all involved in the calls with LPs to answer any questions they had for the new fund. 

Changes in the market 

Not only has LP appetite grown for sustainable investment, but the market is also getting crowded on the GP side. Authenticity is another element to gain LPs’ trust, Brown said. 

“One of the big challenges in sustainability is that people don’t walk the walk, they are big on words but not on actions,” he said. “But we are doing what we say, while delivering good returns to investors. In the end the LPs make judgements. I am sure in the current climate of enthusiastic ESG/sustainability investors, there would be some sharks among them, same as anywhere. We haven’t lost anyone because we are not impactful enough just because we are not an impact fund.” 

Brown said they chose to pivot the new fund into sustainable infrastructure for a few reasons. First, the firm has a long-established history in the area, second, there had been more capital flow into the area partly driven by ESG and impact investing, thirdly, simply because that’s where the world is heading.  “There is a tsunami of interest going in these types of issues that wasn’t even there perhaps maybe just four, five years ago. The amount of mentions of climate change or sustainability, I could have counted them with one hand five years ago but now I would need 700 hands to count them.”  

Brown believe part of the reason is that people realize that private capital can make a difference. At the end of the day, the government does not have infinite money to support all the solutions needed to turn around climate change, something has to come from the private sector.  He said LPs are waking up now thinking their capital can make a difference. 

The enlightened industry 

Among the 50-ish Actis Energy 5 LPs, a few are new big-ticket investors, including public pension funds from the US, sovereign wealth funds from the Gulf, insurance and pension investors in Europe, and some other new investors from Asia. Brown said although they had some previous interactions with the new investors, the team still had to be creative to get the ideas through to them for the new fundraise, such as performing a virtual tour of the Taiba windfarm for LPs to get a better idea of their investments.  

Brown said it was “nice” that people are more aware of the impacts of their investments, even beyond climate change to include community impact and other factors. “But performance is still overarching,” he concluded. “Institutional money is still a commercial proposition. But the good news is you don’t have to run an impact fun at 1% return because you don’t have to make a choice between impact and return. For us, there is no trade off, they should go together and we are able to deliver both of them.” 

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