NEW YORK: One of the most beleaguered financial labels on Wall Street has quietly been making inroads in the private credit market.
Environmental, social and governance (ESG) – regularly derided as “woke” and anti-capitalist in the United States – is finding a foothold away from public scrutiny.
Of the US$156bil raised by private credit funds last year, about 16% went into products claiming to target ESG goals, according to data provided to Bloomberg by Preqin.
That’s a bigger share than for any year since at least 2014, with figures through June this year indicating the trend is set to continue.
The development coincides with dwindling access to loans for green businesses that aren’t new enough to appeal to venture capitalists, or big enough to lure infrastructure investors. That’s opened the door to private credit managers willing to build funds on loans to that middle segment.
Money managers seeing an opportunity include Lombard Odier Investment Managers. The Swiss firm has zeroed in on smaller green loans to mid-sized firms, in order to then package them into portfolios for institutional investors.
Lombard Odier’s flagship Sustainable Private Credit Fund, launched in July 2022 with an anchor commitment from the UK Environment Agency Pension Fund, is targeting up to US$500mil in managed assets with a net annual return of about 12%.
“We prefer to step back from some of the more acrimonious debates and serve markets where value is being created,” Rhys Marsh, a portfolio manager at Lombard Odier, said in an interview. “The scale of the opportunity set ahead of us is enormous.”
The collapse of Silicon Valley Bank in 2023 and the US regional banking crisis that ensued added to the hurdles that small green businesses face when they try to access financing.
That’s as renewable-energy stocks suffer continued declines, with the S&P Global Clean Energy Index down more than 30% since the beginning of 2023. In the same period, the S&P 500 has gained about 45%.
Private credit funds address a market that’s “fragmented, distributed, and currently inefficiently financed,” said Peter Pulkkinen, who oversees Lombard Odier’s Sustainable Private Credit Fund with Marsh.
“There’s a tremendous amount of capital that’s looking to write US$100mil-plus cheques, but what we like to do is help industrialise those initial cohort pools of scale.”
Barclays Plc is among financial firms noting that the current climate has left a “missing middle” of green businesses struggling to get financing.
Daniel Hanna, the bank’s global head of sustainable finance, said in April there’s now a need for “more focus” on such mid-sized deals, as Barclays’ newly assembled transition finance team looks for growth opportunities.
The shift in focus comes as key planks of the green economy struggle to compete at a time of high interest rates and rising bank capital requirements.
The risk is that the industries most needed to bring about the transition to clean energy are deprived of the capital they rely on to stay afloat, according to Chuka Umunna, JPMorgan Chase & Co’s head of ESG and green economy investment banking for Europe, the Middle East and Africa.
“Helping innovative companies clear the commercial valley of death will require us to think differently about capital,” he said during a panel at the Bloomberg Sustainable Finance Forum in London in June. — Bloomberg