Combining green aspirations, decarbonization, and strong financial returns
Can business and finance help the world meet the climate change challenge? The private sector will have to provide most of the extra capital required to reach net zero by 2050, according to the International Energy Agency.
Private capital’s playing a significant role across infrastructure, transport, and energy. At Preqin, we tallied 111 private equity transactions and 1,008 venture deals in the cleantech sector in 2022, worth a combined $45bn.
Asset manager Unigestion is raising a €300mn Climate Impact Fund for buyout and growth deals in 20–30 innovative companies.
In private equity, the firm has $10.8bn AUM, a 30-year track record, and more than 60 professionals around the world. But is it realistic to combine low-carbon aspirations, stringent impact criteria, and strong financial returns?
Shaun Beaney, Editor of Preqin First Close, asked Joana Castro, Private Equity Partner, and Paul Newsome, Head of Portfolio Management at Unigestion.
Tell us about your climate impact strategy.
Joana Castro: We had our first fund in the environmental space in 2010. Unigestion was a limited partner in funds and an investor in deals pioneering these strategies. We’re talking about funds like Ambienta, now one of the key names in Europe in this space. In the US, we’re talking about people like Al Gore-backed Generation. We’ve also made a number of successful co-investments and secondaries.
For us it was a natural segue to launch our current fund. We’ve seen increasing investor demand as a result of the tighter regulatory environment, including the EU’s Sustainable Finance Disclosure Regulation (SFDR) in March 2021. We really wanted to launch a product that provided investors with exposure to climate impact investments in an SFDR Article 9 format.
What’s the focus of the Climate Impact Fund?
Joana Castro: We’re aiming to build a portfolio of companies that have the objective of decarbonizing the economy. We back companies that provide innovative solutions to enable all their customers in their own decarbonization journeys, and we back companies on their own journeys to decarbonize – to transform their ways of doing business and really become green companies.
Why is it called an ‘impact’ fund?
Joana Castro: This is climate impact, with quantification of impact. That’s core to our strategy, and if we cannot quantify it, we cannot include it in the fund, because we cannot claim that it makes a significant impact. Under the SFDR, ‘sustainable investment’ means investment – in this case, in companies – where you have a positive impact on a particular dimension – so, in this case, climate – and at the same time you don’t have negative externalities.
What kinds of investors have you attracted so far? Do they have specific allocations to environmental impact? Are they specialist LPs?
Paul Newsome: Both. You do get investors who’ve developed allocations to impact, and then you get investors who invest from their private equity allocations. One of the key points of our strategy is that we’re aspiring to deliver impact and returns. While we’re delivering impact, we’re not compromising private equity returns. On the contrary, we believe that focusing on climate impact opportunities goes hand-in-hand with out performance. Our investors include a US foundation, two regional pension funds, and an existing client – a financial institution. The story also resonates well with family offices and public pension funds.
Joana Castro: We also see interest from wealth managers who have access to retail clients. I guess that’s part of the general trend of democratization of the private equity industry.
Is there still skepticism about combining hard impact measures with genuine returns?
Paul Newsome: If you look at our track record, some of our best investments have been in the climate impact space. Part of that’s because that’s where the tailwinds are that drive growth. Part of it is the pricing power of leading companies. And then, at exit, you’re often able to capture the green premium by selling to strategics or larger private equity funds. One of our best-ever returns was when we invested in electric vehicle charging provider ChargePoint in 2016, which listed in 2021.
Have you done any deals from the new fund since the first close in October?
Joana Castro: Yes. We have made a co-investment in a platform focused on developing low-carbon heating networks in mid-sized towns in the UK. We’re partnering with Asper, a specialist fund manager who we backed for the first time in 2010. The low-carbon heating networks will replace natural-gas boilers with centralized heat pumps. Approximately two-thirds of the emissions that would be produced by natural gas are expected to be avoided.
What’s the competitive situation for a fund like this to raise capital and find enough deals?
Joana Castro: The focus of our fund is on buyouts, growth, and what we call ‘project build-ups’. We feel our positioning is quite differentiated because we have this wide range of transactions but do not focus on riskier early-stage deals. Also, we don’t invest only in energy transition. We have seven climate-impact sectors, so it’s quite wide. In terms of deal flow, the pipeline’s very rich, despite keeping the bar high and being very selective.
Paul Newsome: The two things we hear most from investors is that you guys [Unigestion] are the only ones we’ve seen who have a long track record of delivering strong returns with impact, and, importantly, you’re able to measure it.
Shaun Beaney is Editor of Preqin First Close, the essential newsletter for the global alternatives market. It’s quick, easy, and free to subscribe here.
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