In January, affiliate title Secondaries Investor reported that impact manager Summa Equity was looking to move Norwegian biowaste company Norsk Gjenvinning from its debut fund to a separate vehicle. The move could mark the beginning of a wave of GP-led secondaries in the impact space, as this burgeoning asset class appears to have reached a critical stage in its growth and maturity.
Tom Jorgensen, a managing director at dedicated impact secondaries player North Sky Capital, says his firm has primarily seen these transactions focus on healthy living investments to date, but adds that assets that clearly benefit from the US Inflation Reduction Act could also be well suited to a GP-led secondaries solution.
Jorgensen expects to see increased action in this area as early-stage ventures that have benefited from a huge influx of capital into the environmental impact space in recent years reach a scale where a continuation vehicle starts to make sense. “Equally, some of the firms and funds launched in earlier eras of the impact industry don’t necessarily have a clear go-forward plan,” he adds. “We may start to see continuation vehicles used as a final liquidation solution.”
Immanuel Rubin, a partner and head of European secondaries at Campbell Lutyens, believes environmental considerations could prove a powerful thesis for GP-led secondaries in the mainstream private equity arena as well. “It strikes me that a huge amount of money is being raised to support decarbonization in the primary market,” he says.
“LPs are looking for the opportunity to invest in a way that supports their own sustainability objectives. But while GPs are busy trying to identify assets that suit this investment strategy, they may be ignoring the fact that they already own assets that fit the bill.”
What stops GPs from pursuing those ESG transformations is typically a lack of capital or lack of time remaining in the existing fund. “But continuation vehicle technology could allow GPs to execute on these opportunities,” Rubin says.
He alludes to a recent conversation regarding a specialist steel manufacturer with high energy demands. “The GP recognized the potential to move production closer to the generation of renewable energy in order to reduce energy costs,” Rubin recalls. “The initial outlay for such a project would clearly be substantial but given today’s electricity costs could quickly be recouped.”
While it is unlikely a traditional buyer in the M&A market would attribute value to that potential, LPs with existing knowledge of the asset and manager are likely to consider this a compelling rationale for a GP to exploit a genuine economic opportunity before later selling the business as a very different asset.
“There is a scarcity of capital in today’s environment, but investors are still clamoring for truly sustainable Article 9 investments,” Rubin adds. “Any continuation vehicle requires a strong narrative, and that is exactly what this type of ESG transformation provides.”
Adam Black, a partner and head of ESG and sustainability at Coller Capital, says the proliferation of net-zero commitments that GPs – and in some cases assets – are making also supports this trend. “As more funds and assets with net-zero commitments come to the secondaries market over time, that creates a real opportunity for secondaries investors to leverage those commitments and to help those participants follow through.
“As secondaries investors, we primarily think about ESG in terms of risk, but really risk and opportunity are two sides of the same coin. It is our responsibility to ensure that GPs and assets are progressing on the commitments they have made or the improvements that we believe they can and should make.”