A Singapore-based private equity (PE) fund has become the first in the world to secure financing for PEs that is tied to sustainability improvement, reflecting the rising interest from the financing sector in factoring in the environmental, social and governance (ESG) aspects in private capital.
The fund, Quadria Capital, secured a US$65 million (S$89 million) three-year revolving facility from ING, through which Quadria will have its borrowings' interest rate pegged to its sustainability performance, ING said in a press statement last Friday.
Quadria Capital is a private equity sponsor focusing on the healthcare sector in developing Asia. It has raised a substantial portion of its US$500 million Quadria Capital Fund II and expects to close the fund by the end of this year, ING said.
Quadria's facility will peg the interest rate to a set of ESG performance targets on its Fund II investee companies and investment portfolio. With this, the interest rate will be linked to the fund's sustainability improvement through its investment activities.
The set of ESG metrics is based on key performance indicators provided by B Analytics and further mapped to Quadria's internal ESG frameworks - which follow the United Nations' Principles for Responsible Investment (PRI) - as well as an independent materiality assessment.
Performance of the fund against these metrics will be assessed annually by B Analytics, and if predetermined targets are met, the interest rate will be reduced in the following year. ING did not disclose the rate of reduction.
This comes as private capital makes up just 6 per cent of the PRI signatories' US$90 trillion in assets under management globally, said Ms Herry Cho, ING's head of sustainable finance for Asia.
"The potential for private capital to become more ESG-focused is quite significant," said Ms Cho, adding that the bank aims to promote "socially responsible behaviour" in the funds and fund managers financed by the bank, by incentivising their shareholders.
Mr Eddy Henning, ING's head of clients and sectors for the Asia-Pacific, further said that private equity sponsors will increasingly link their performance to sustainability metrics because the returns of the asset class have been generally outperforming others, as allocations from the international investor base also increase.
"These investors have caught on to the fact that contrary to popular belief, an ESG strategy can enhance returns as well as unlock new access to capital," he added. "We see sustainability improvement products highly replicable not only in private equity and healthcare, but also in real assets, infrastructure or financial inclusion, among others."
Quadria Capital's managing partner Abrar Mir said it was a "meeting of minds" between Quadria and ING when the bank first made the proposal. "Quadria Capital is a firm focused on a dual mandate of positive investment returns with constructive social impact by increasing and improving accessibility and affordability to healthcare in South and South-east Asia," he said.
In 2017, ING was the first financial institution globally to launch the concept of a sustainable loan when it collaborated with Royal Philips on a €1 billion (S$1.5 billion) syndicated loan that had the interest rate coupled to sustainability performance and rating.
ING has closed four sustainability improvement loan facilities in Asia so far, including with Wilmar International. It has closed 66 such deals globally.