The integration of Environmental, Social, and Governance (ESG) factors has become a defining feature of private equity (PE) and private debt investments, reshaping how deals are sourced, due diligence is conducted, and value is created. Industry leaders are navigating the challenge of balancing ESG considerations with delivering high returns, a process that reveals both opportunities and tensions.
This was among the hot topics thrashed out during a lively roundtable of eminent industry executives held in London in November.
Mark Corbidge, chief executive and founder of Abbeydale Partners, said the emphasis on sustainability had been “evolving for quite some time” and that ESG has moved beyond being a simple investment factor to becoming a major driver in deal sourcing. “There’s a beeline to buy anything with an ESG complexion to demonstrate to LPs that you’re ticking the ESG box,” he said.
He cited a recent example of Sun Capital’s sale of Adler and Allan, an environmental services firm, to Goldman Sachs. “It sold for over 4.4x in dollar terms and a 56.3% given impressive growth from £12m to £42m of Ebitda and driven by the rising appeal of ESG-friendly assets.”
For Steven Tredget, a partner at Oakley Capital, the emphasis lies in improving sustainability post-acquisition.
“Our LPs aren’t asking for ESG credentials outright; they want to know how we’ll enhance sustainability during ownership.” He refutes the notion that ESG hinders returns. “On the contrary, sustainability reduces costs, mitigates risks, and builds business resilience, which is a net positive for returns.”
Tredget likens ESG to the digital revolution of a decade ago: “If a business isn’t sustainable, it risks being obsolete. We’re just beginning to understand what that means while navigating political debates that often misrepresent ESG’s impact on profitability.”
Guy Hume, managing director, Private Capital Advisory at Raymond James, highlighted regional variations in ESG priorities.
“In North America, historically the focus has leant more towards social factors like diversity and inclusion, whereas Europe emphasizes environmental issues. For European LPs, if a manager is not at SFDR Article 8 or better, they might move away.”
He also noted that the private wealth sector approaches ESG differently. “Family offices tend to prioritize strong ESG impact, while retail investors focus more on brand and performance.”
Phil Bartram, a partner at City law firm Travers Smith, underscores this divergence. “European wealth managers are required to ask clients about their portfolio’s alignment with ESG factors. This trend could shift further as younger generations, often more ESG-conscious, take charge of family wealth,” he told his fellow panellists.
The consensus among experts is that ESG is a mechanism for value creation. “Private markets are uniquely positioned to drive ESG initiatives, unlike public markets where influencing costs and strategy is challenging. With private equity, you have control, enabling you to implement changes that enhance value,” said Bartram.
Tom Taylor, head of policy (legal & regulatory), at the BVCA trade body, expanded on this, saying, “Using an ESG lens during due diligence is often seen as just good investing. Ignoring ESG factors can mean failing to assess critical risks and opportunities that impact value creation and ultimately exit price.”
Despite the growing emphasis, challenges persist. Reporting requirements are a significant hurdle, especially in private markets. “Measuring ESG quantitatively is tough,” observes David Genn, chief executive of investment platform technology provider Goji. “Startups addressing this issue have emerged, but it’s far from solved.”
Bartram noted another challenge: “The European Union’s double materiality approach, which focuses on both a business’s impact on the world and the world’s impact on the business, has created confusion,” he said.
“This ambiguity has sparked concern, especially among certain US investors, who fear ESG might sacrifice returns.”
ESG as Opportunity
Anthony Diamandakis, head of Global Asset Managers, Citi, observed that ESG funds have carved a niche, particularly in energy transition and impact investing. “Groups like TPG’s Rise fund have successfully integrated societal impact metrics alongside traditional financial metrics, providing a new way to evaluate investments.”
Corbidge added: “These funds are setting a precedent. They require investments to meet IRR hurdles while also demonstrating societal impact, offering a dual measure of success.”
As ESG continues to mature, its integration into private markets is becoming less about compliance and more about strategic advantage. “In time,” Tredget noted, “sustainability will be a hygiene factor, much like digital transformation became essential a decade ago.”
The private equity and private debt sectors are uniquely positioned to lead this transformation, creating resilient, high-performing businesses while aligning with societal goals. As the frameworks and tools for measuring ESG improve, the industry will likely see even greater alignment between sustainability and profitability.
The discussion then turned to the issue of the cross-border distribution of Alternative Investment Funds AIFs in the European Union.
Among the questions discussed here were: What are the biggest challenges and opportunities associated with the cross-border distribution of AIFs within the EU? And how are different jurisdictions’ regulations influencing fund managers’ strategies?
As fund managers navigate a web of regulations, the industry’s ability to balance accessibility, compliance, and cost remains crucial.
Push for Simplification
Bartram noted that the European Commission is actively seeking input from the industry to streamline fund distribution. “The new commissioner, a former Portuguese finance minister, is asking how to make it easier to distribute funds. Their focus is on channelling capital into the European real economy,” he said.
However, Bartram emphasized the reality of global capital flows. “Money doesn’t necessarily flow from European LPs to European assets. Capital is fungible, and the Commission must consider this.”
While the EU’s passporting regime simplifies fund sales for institutional investors, Bartram highlights a lingering issue: licensing for investor relations professionals. “If you’re a US or UK sponsor without an EU-based platform, navigating the necessary licenses for boots-on-the-ground sales remains a technical challenge.”
Hume underscored the practical difficulties stemming from regulatory inconsistencies across jurisdictions. “We see challenges with the advice GPs get on what they can do, and it varies significantly. Often, GPs are effectively paying to educate their counsel, which is inefficient and costly,” he said.
Hume also pointed to Europe’s wariness of foreign funds. “There’s deep suspicion in some markets. In certain jurisdictions, you’re simply not allowed to operate unless you set up a European platform, which adds significant cost,” he said.
This creates a barrier for some global firms, especially those with ample capital-raising opportunities outside Europe. “For many, particularly Californian venture strategies, the cost isn’t worth the potential gain.”
Brexit’s Lingering Impact
Brexit continues to shape the dynamics of fund distribution with Taylor highlighting its effects on UK firms.
“The need for boots on the ground and substance in Luxembourg has increased significantly. While some firms opt for the EU AIF structure, others prefer selective national private placement regimes, avoiding the need for a more expensive Luxembourg presence,” he said.
Corbidge, meanwhile, illustrated Brexit’s real-world friction with a personal anecdote: “When I fly into Schiphol wearing a suit and tie, I’m immediately questioned about the purpose of my visit. Meanwhile, British team members with only British passports are stuck in lengthy queues. It’s a small but telling example of the additional challenges we face post-Brexit.”
For managers who commit to establishing a European presence, the process is demanding but ultimately straightforward, according to Tredget.
“We’ve set up substance in Luxembourg, allowing us to market across jurisdictions easily. However, the cost and registration process, particularly in markets like Japan, is a hurdle.” Despite this, Tredget noted that once fully authorized, the process becomes manageable.
Bartram reiterated the expense of maintaining an EU AIF structure. “It’s not a trivial cost, and for some smaller or mid-market managers, alternative strategies like national placement regimes may remain more attractive,” he said.
Trends and Opportunities
Despite the challenges, the cross-border distribution of AIFs offers significant opportunities. Bartram sees potential in semi-liquid structures that cater to professional and institutional investors. “The Commission’s interest in unlocking capital for the European real economy could lead to more streamlined processes, particularly for these types of funds.”
Hume identified a growing trend toward tailoring strategies to specific jurisdictions. “The variability in regulatory environments forces fund managers to adapt,” he said. “Firms that can navigate these differences effectively will have a competitive edge.”
Meanwhile, Taylor observed a gradual shift in attitudes. “Post-Brexit, firms are using various routes to maintain access to European markets. The next five to ten years will likely continue to see a blend of national and EU-wide approaches, depending on firm size and strategy.”
The future of cross-border AIF distribution will likely hinge on greater regulatory harmonisation and technological innovation.
As Bartram noted, “The European Commission is listening, which is a positive sign.” However, overcoming inefficiencies and inconsistencies remains critical.
For Tredget, Brexit may continue to influence strategy but should not overshadow broader global opportunities. “While Europe presents challenges, large pools of capital outside Europe — like in the US, Canada and Middle East — offer fewer barriers.”
Corbidge concluded by emphasising the need for practical solutions. “From licensing hurdles to travel friction, addressing these issues will be essential for maintaining Europe’s attractiveness as a fund distribution hub.”
The cross-border distribution of AIFs in the EU is a tale of opportunity tempered by complexity. As regulators seek to strike a balance between facilitating capital flows and maintaining oversight, fund managers must adapt to a rapidly changing environment. With the right strategies and innovations, the potential to unlock significant value for investors and the broader economy is immense.
Expanding access to private markets
Increasing access to private market funds for retail investors – often referred to as ‘democratisation’ – is one of the most commonly debated issues within the industry but what are the implications of this shift for both fund managers and investors?
The trend is transforming the investment landscape, offering retail and high-net-worth investors access to opportunities historically reserved for institutional players. This trend raises questions about its implications for fund managers, investors, and the broader financial ecosystem.
The panel shared how they are addressing the risks and complexities that come with expanding access to non-institutional investors.
Genn, a platform technology provider, emphasises the untapped potential in retail and high-net-worth investors.
“Private wealth is a big, untapped pool of capital,” he said. “Distributors like private banks are eager to access these funds. However, investor education remains a significant challenge. While semi-liquid funds make private markets more accessible, they aren’t mutual funds, and their liquidity profiles are fundamentally different.”
Bartram agrees, but with a caveat. “For now, in Europe, retailisation is something of a misnomer. It’s not retail in the traditional sense. We’re talking about non-professional, high-net-worth, and mass-affluent investors, with minimum commitments ranging from $25,000 to $250,000, depending on jurisdiction.”
Bartram highlights the growing adoption of semi-liquid funds, spearheaded by firms like Blackstone, Carlyle and Brookfield. “These umbrella strategies are expanding, with single-strategy managers increasingly entering this space. But to distribute these funds effectively across Europe, managers must navigate complex country-by-country regulations.”
Regulatory Complexities and Investor Risks
Taylor, meanwhile, underscored the importance of regulatory frameworks, particularly in the European Union.
“The European Long-Term Investment Fund (ELTIF) offers a single market passport to retail investors, but managers must comply with various additional product rules. This creates operational and educational challenges for fund managers.”
Corbidge added: “It’s perplexing that sophisticated investors need special qualifications to access private equity funds, yet retail investors can freely trade in highly volatile assets like crypto or certain listed equities without guardrails. This inconsistency calls for a comprehensive re-evaluation of investor protection regulations.”
Investor education is another hurdle. Genn highlights discrepancies in the quality of information available. “Some managers overstate potential returns or downplay risks, leading to misinformed investment decisions. The industry must self-regulate to avoid repeating past issues, such as those seen with open-ended real estate vehicles in the US..”
Tredget points to the disparity in perceptions of private markets between the US and Europe. “In the US, private businesses and their investors are celebrated. There’s a positive halo effect around private equity, which contrasts sharply with Europe’s cautious approach.”
Corbidge concurs, noting that Europe lags behind the US in its embrace of private markets. “Despite growth, the UK and Europe haven’t caught up with the US in celebrating the role of private equity in economic growth. Without better PR and clearer narratives, misconceptions will persist.”
However, Taylor observes a positive shift in UK policy discourse. “Economic growth is now central to the political agenda. Recent comments from policymakers, like the Chancellor and other UK ministers’ acknowledgment of private capital funds’ role in national prosperity, signal a changing tide.”
The Evolution of Fund Structures and Strategies
As private markets evolve, new fund structures are emerging to accommodate diverse investor needs, Diamandakis notes.
“The goal is to first target ultra-high-net-worth and high-net-worth individuals before moving to retail. This requires new products and strategies tailored to different investor profiles,” he said.
The trend toward permanent capital structures, as Bartram observes, is another key development. “Continuation vehicles and other permanent capital models are gaining traction, providing stability and reducing the need for frequent exits. However, managers must navigate investor concerns about whether such strategies genuinely deliver value.”
Corbidge highlights the shift in investment preferences. “UK pension fund allocations to public markets have plummeted from 48% in 2000 to 6% in 2020. Meanwhile, private equity fundraising has surged from £3 billion to £70.2 billion over the same period. This trend reflects a broader move toward alternative assets as public market returns falter.”
Challenges and Opportunities for Fund Managers
For fund managers, the democratisation of private markets introduces operational complexities. Bartram explains, “Managers must establish robust distribution agreements, adapt to varied regulations, and educate investors. This dynamic is vastly different from the traditional LP model.”
The influx of retail investors also forces managers to rethink their allocation strategies. “Balancing opportunities between closed-ended funds and semi-liquid vehicles is challenging,” Bartram notes. “As private markets grow, scrutiny over fees, carry, and transparency will only intensify.”
Corbidge warns that geopolitical shifts could disrupt the democratisation trend. “If policies like expanding 401(k) access to private equity gain traction in the US, we could see a flood of new investors. This would reshape the market but also amplify risks if not managed carefully.”
The democratisation of private markets is poised to accelerate, with implications for investors, managers, and policymakers. Tredget predicts, “Private markets will increasingly dominate, offering diversification and resilience that public markets struggle to provide.
“Many attractive private companies are choosing to stay private, and access to these opportunities represents access to a deep pool of otherwise unseen private companies and their performance.
However, as Taylor notes, success hinges on striking the right balance. “The industry and policymakers must ensure that increased access doesn’t come at the cost of investor protection or sustainable returns. Education, transparency, and innovation will be critical to navigating this transformative era.”
As private markets continue to expand, the democratisation trend offers a path toward broader participation and economic growth. Yet, it also demands careful navigation to address the complexities and risks of opening the doors to a wider audience.
The panel
Phil Bartram, partner, Travers Smith
Mark Corbidge, chief executive and founder, Abbeydale Partners
Anthony Diamandakis, head of Global Asset Managers, Citi
David Genn, chief executive, Goji
Guy Hume, managing director, Private Capital Advisory, Raymond James
Tom Taylor, head of policy (legal & regulatory), BVCA
Steven Tredget, partner, Oakley Capital
Mark Latham, Deputy Editor, Funds Europe (Moderator)
