Waiting for talk to turn to action
30 Oct 2019
Dominic Wheatley of Guernsey Finance attended the recent
BVCA Summit and reflects on the interest of the private equity industry in green finance—and the pace of change
Image: Shutterstock
Over the past five years more money has been raised, invested and distributed back to investors through private equity than in any other period in the history of the industry.
Total fundraising in 2018 was more than £34 billion, as nearly 100 funds raised new capital, deal values increased, and the industry benefited from unprecedented investor interest. More than £30 billion was invested—a rise of 21 percent—across more than 1,300 companies.
A new report, co-authored by the British Business Bank, says that defined contribution pension savers should be encouraged to invest into alternative assets, including venture capital and growth equity funds, for the opportunity for enhanced returns. They estimate that an appropriate asset allocation to private equity (PE) within such funds could lower the typical required funding level for a 22-year-old pension saver from 9.7 percent to 7.2 percent of earnings. Over a career, this is certainly a saving worth having.
The report also highlighted a Guernsey investment company with pension fund investors which has a strategy to invest directly into pre-IPO portfolio companies.
In Guernsey, a leading centre for private equity funds, private equity assets under administration now accounts for more than £112 billion, that is 40 percent of the entire Guernsey funds market, and 60 percent of the Guernsey closed-ended sector. Another trend being evidenced in the sector is increased interest in green, sustainable and environmental, social and corporate governance (ESG)—a discussion which dominated the annual BVCA Summit in London.
The topic is not particularly new, but it is a subject certainly engaging private equity managers and their advisers at this time.
Some of the leading figures in the industry—many of whom use Guernsey for structuring their funds—told the BVCA of the role which ESG now plays in their businesses.
The majority say now that every investment they look at is subject to some level of ESG analysis, both for the purposes of risk mitigation and also the business opportunities which might lie within. ESG, they said, is a lever for “good” impact, but also, crucially, for the bottom line.
It is now argued that managers can achieve better returns. If they take ESG really seriously, they can build better businesses, more longevity and better profits.
It appears that the opportunity for the private equity sector is the speed with which good ESG governance principles can be more rapidly adopted across the portfolio and the influence which PE ownership can bring to bear on underlying managers.
The driver for taking up of ESG is coming both from inside and outside the PE structures. Institutional investors are starting to focus on responsible investing, while the new generations in the workplace are feeling much more engaged on this topic.
“We’re seeing increasing expectations from stakeholders about transparency and accountability, which is part of the drivers for action,” said one manager. “There’s a long way to go with ESG but it will become part and parcel about how everyone thinks about investment.”
Guernsey-based managers and service providers for the PE sector said that while ESG is a big talking point at present, moving towards green and sustainable finance should be the next step.
“Managers want to ‘have it all’,” said one, “good governance, sustainability and long-term performance. But changing investor patterns and consumer habits are significantly shifting the focus. Green is a real talking point and we believe it is investors who are driving that change.”
The evidence of conversations around the BVCA Summit also reflects research recently carried out by Guernsey Finance into enthusiasm for green and sustainable investment from the family office and private capital sectors.
That research indicated that while the enthusiasm for green and sustainable investment is rising, the reality is that there is still clearly insufficient capital finding its way into climate change mitigation projects and the commitment to green and sustainable finance is partial at best.
Greater confidence in returns and greater confidence in the “greenness” of the underlying investment are still both required to catalyse a potential modal shift in the deployment of private capital to climate finance. This is likely to be replicated among the 22-year-old pension savers featured in the British Business Bank report.
Gen Z savers and consumers place a very high premium on ESG, as was highlighted by speakers at the summit. Despite the populist rhetoric—be it saving the planet, the ice caps or polar bears—our evidence shows that when it comes to investment, the number one concern for HNWI and their advisers is preservation and growth of capital. I am sure this is also a concern of Generation Z, but perhaps not their number one.
Guernsey is, however, well-positioned to deliver on this surge of interest in green and sustainable investment in private equity funds. Our experience and expertise in both means that Guernsey will be a natural home for those looking for the enhanced returns of private equity, focused on green and sustainable objectives.
Total fundraising in 2018 was more than £34 billion, as nearly 100 funds raised new capital, deal values increased, and the industry benefited from unprecedented investor interest. More than £30 billion was invested—a rise of 21 percent—across more than 1,300 companies.
A new report, co-authored by the British Business Bank, says that defined contribution pension savers should be encouraged to invest into alternative assets, including venture capital and growth equity funds, for the opportunity for enhanced returns. They estimate that an appropriate asset allocation to private equity (PE) within such funds could lower the typical required funding level for a 22-year-old pension saver from 9.7 percent to 7.2 percent of earnings. Over a career, this is certainly a saving worth having.
The report also highlighted a Guernsey investment company with pension fund investors which has a strategy to invest directly into pre-IPO portfolio companies.
In Guernsey, a leading centre for private equity funds, private equity assets under administration now accounts for more than £112 billion, that is 40 percent of the entire Guernsey funds market, and 60 percent of the Guernsey closed-ended sector. Another trend being evidenced in the sector is increased interest in green, sustainable and environmental, social and corporate governance (ESG)—a discussion which dominated the annual BVCA Summit in London.
The topic is not particularly new, but it is a subject certainly engaging private equity managers and their advisers at this time.
Some of the leading figures in the industry—many of whom use Guernsey for structuring their funds—told the BVCA of the role which ESG now plays in their businesses.
The majority say now that every investment they look at is subject to some level of ESG analysis, both for the purposes of risk mitigation and also the business opportunities which might lie within. ESG, they said, is a lever for “good” impact, but also, crucially, for the bottom line.
It is now argued that managers can achieve better returns. If they take ESG really seriously, they can build better businesses, more longevity and better profits.
It appears that the opportunity for the private equity sector is the speed with which good ESG governance principles can be more rapidly adopted across the portfolio and the influence which PE ownership can bring to bear on underlying managers.
The driver for taking up of ESG is coming both from inside and outside the PE structures. Institutional investors are starting to focus on responsible investing, while the new generations in the workplace are feeling much more engaged on this topic.
“We’re seeing increasing expectations from stakeholders about transparency and accountability, which is part of the drivers for action,” said one manager. “There’s a long way to go with ESG but it will become part and parcel about how everyone thinks about investment.”
Guernsey-based managers and service providers for the PE sector said that while ESG is a big talking point at present, moving towards green and sustainable finance should be the next step.
“Managers want to ‘have it all’,” said one, “good governance, sustainability and long-term performance. But changing investor patterns and consumer habits are significantly shifting the focus. Green is a real talking point and we believe it is investors who are driving that change.”
The evidence of conversations around the BVCA Summit also reflects research recently carried out by Guernsey Finance into enthusiasm for green and sustainable investment from the family office and private capital sectors.
That research indicated that while the enthusiasm for green and sustainable investment is rising, the reality is that there is still clearly insufficient capital finding its way into climate change mitigation projects and the commitment to green and sustainable finance is partial at best.
Greater confidence in returns and greater confidence in the “greenness” of the underlying investment are still both required to catalyse a potential modal shift in the deployment of private capital to climate finance. This is likely to be replicated among the 22-year-old pension savers featured in the British Business Bank report.
Gen Z savers and consumers place a very high premium on ESG, as was highlighted by speakers at the summit. Despite the populist rhetoric—be it saving the planet, the ice caps or polar bears—our evidence shows that when it comes to investment, the number one concern for HNWI and their advisers is preservation and growth of capital. I am sure this is also a concern of Generation Z, but perhaps not their number one.
Guernsey is, however, well-positioned to deliver on this surge of interest in green and sustainable investment in private equity funds. Our experience and expertise in both means that Guernsey will be a natural home for those looking for the enhanced returns of private equity, focused on green and sustainable objectives.
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