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A slum in New Delhi. Companies that comply with ESG principles will also benefit from a higher return on equity, according to Bank of America Merrill Lynch. Photo: AFP

Asian private-equity managers turn to impact investing as demand rises among US, Europe investors, eye stronger returns and fundraising

  • Investors in the US and Europe are increasingly favouring investments that comply with ESG principles
  • Private-equity managers such as KKR, Quadria Capital are taking the lead in this sector

Private-equity managers in Asia are increasingly turning to impact investing, or investments that generate a social and environmental impact alongside financial returns, in the search for higher returns as well as to attract more funds.

Investors in the United States and Europe are increasingly favouring investments that comply with environment, social and governance (ESG) principles.

“Managers need to stay competitive, because this year and 2020, the fundraising environment will be more difficult. If a manager offers an ESG fund option, it could attract more capital for your fund in a competitive fundraising market,” said Marcia Ellis, a partner at law firm Morrison Foerster based in Hong Kong.

Companies that comply with ESG principles will also benefit from a higher return on equity. According to “ESG matters – US, top 10 reasons you should care about ESG”, a report released by Bank of America Merrill Lynch in September, companies rated highest in the MSCI ESG indices – which ranks companies according to the ESG principles – showed a higher median forward one-year return on equity, at about 17 per cent, compared with about 13 per cent for companies with the lowest score.

AXA Investment Managers announced late last month that it would launch a fourth private-equity impact investing strategy this year. Aiming to raise US$400 million, AXA Investment Managers was planning to invest a third of the capital in South and Southeast Asian companies. These private companies should be focused on addressing the basic needs of consumers, such as promoting access to health care or financial inclusion.

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US buyout firm KKR said it has invested US$5.3 billion over the past decade in companies whose business models help advance global, environmental, educational and workforce development as well as solutions to other societal challenges. Its global impact business was, however, created in 2018.

Jonathan Dean, head of impact investing at AXA Investment Managers, said compared with investing in public companies, the private-equity approach provided better means to measure the impact created by companies.

“[By] being an equity holder in a fund or a direct investment, we are able to play a role in defining the impact that we seek. In listed companies, there are many investors and [our investment into these companies] is not a direct transaction, but often traded through a secondary market,” he said.

Banks that finance private-equity funds and their investments are also stepping in. This month, ING Group closed what it claimed to be the world’s first “sustainability improvement capital call facility” for Singapore-based Quadria Capital, a health care focused manager with more than US$1.8 billion in assets. The interest rate of the facility is pegged to the improvement in the sustainability impact of the investment portfolio.

The US$65 million three-year revolving facility is essentially a bridging loan that provides Quadria with financing for its new US$500 million fund, for which fundraising is still ongoing. The facility will let Quadria invest in private companies even before investors’ committed capital is received.

The facility’s interest rate is tied to ESG performance targets that companies funded by Quadria must meet. These companies will be audited against the ESG principles by an independent analytics firm. If targets are met, the interest rate will be lowered.

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“Our aim here is to encourage active ESG engagement throughout the investment life cycle, from sourcing to asset management, by rewarding funds for making continuous improvement with lower interest rates,” said Fi Dinh, director at ING’s Asia-Pacific investment industry finance team.