Propelling sustainability-linked bonds into the private equity sector

EQT issues the world’s first sustainability-linked bond in the private equity sector; another sign environmental and social investing will accelerate.

Stockholm-based private equity firm EQT AB has set a new precedent across the sector by issuing an inaugural €500mn 10-year sustainability-linked bond (SLB), for which BNP Paribas acted as joint book runner.

Sustainability-linked bonds integrate a specific set of key performance indicators (KPI) which issuers commit to achieve; accruing additional payments to bondholders should they fall short.

Leading the way on sustainable finance

With more than €67 billion in assets under management, the 26 active EQT funds have portfolio companies in Europe, Asia Pacific and the Americas with total sales worth approximately €29 billion and more than 175,000 employees. The companies range from start-ups to mature companies.

EQT’s sustainability strategy focusses on portfolio and operational level integration of environmental, social and governance (ESG), as the private equity firm strives to integrate sustainable business solutions and practices in all its portfolio companies.

Specifically in this inaugural SLB, EQT has embedded three KPIs, the first one is aligned to the UN SDG 13 for Climate Action, and the last two are aligned to SDG 5 for Gender Equality:

  • KPI 1: EQT will have science-based targets relating to reduction of greenhouse gases approved and published by the SBTi before or by 31 December 2023
  • KPI 2a: EQT will employ at least 28% of women among its Investment Advisory Professionals by 31 December 2026
  • KPI 2b: The Board Diversity Percentage at EQT’s portfolio companies will be equal to or greater than 36% by 31 December 2026

The SLB was structured according to EQT’s Sustainability Linked Financing Framework and has obtained a second party opinion from ISS-ESG. This increases the transparency and accountability of the bond.

The SLB saw order books in excess of €1.7bn, and is testament to strong investor reception for the novel structure.

“Investors were very positive around the gender KPIs, and these KPIs are very holistic. They have two points of contact, the investment advisory professionals and then the boards of the portfolio companies” explained Anjuli Pandit, Primary Markets Sustainability Manager at BNP Paribas.

The EQT SLB comes after two ESG linked finance facilities by EQT; the 1st was an ESG-linked fund level facility that BNP Paribas structured in June 2020 to drive change throughout the companies EQT owns by linking pricing on the sustainability- linked loan to the key performance indicators of EQT’s portfolio companies. The 2nd sustainable subscription credit facility was structured in November 2020 for its infrastructure business line. BNP Paribas acted as Agent, Sustainability Agent and Co-Sustainability Coordinator.

Investors were very positive around the gender KPIs, and these KPIs are very holistic. They have two points of contact, the investment advisory professionals and then the boards of the portfolio companies

Anjuli Pandit, Primary Markets Sustainability Manager, BNP Paribas

“BNP Paribas is proud to be a part of EQTs journey towards making the world more sustainable, and the private equity sector is an important mobiliser of impact capital. This is the first ever SLB from a private equity firm and demonstrates the growing role sustainability-linked finance will play in matching issuers’ specific sustainability strategies with their funding needs.” noted Eirik Winter, CEO, Nordic Region BNP Paribas

Mainstreaming ESG across the private equity universe 

More broadly across the market, private equity firms have been embracing sustainable finance mechanisms to accelerate sustainability transition across both their own operations and portfolios. The movement began in early 2020 when Eurazeo became the first private equity firm to announce a syndicated €1.5bn revolver loan, which mixed both operational carbon neutrality targets and governance KPIs for Eurazeo’s portfolio of companies throughout the investment cycle.

In February 2021, The Carlyle Group announced it had extended the scope of sustainability-linked finance to integrate social targets. The $4.1bn sustainability-linked loan finalised by the Carlyle Group tied to the private equity firm’s goal of having 30% diverse directors on the boards of the companies it controls within two years of ownership.

BNP Paribas is proud to be a part of EQTs journey towards making the world more sustainable, and the private equity sector is an important mobiliser of impact capital. This is the first ever SLB from a private equity firm and demonstrates the growing role sustainability-linked finance will play in matching issuers’ specific sustainability strategies with their funding needs.

Eirik Winter, CEO, Nordic Region, BNP Paribas

Will hedge funds be next in the ESG spectrum?

Hedge funds are another segment of alternative investors that are beginning to integrate ESG considerations into their decision-making. A BNP Paribas survey of 53 hedge funds with a combined AUM of over $500bn has found that 40% include ESG considerations in their investment process. The survey highlights that hedge funds are reaching a tipping point of incorporating ESG into their decision-making, finding that the majority of funds will integrate ESG no later than 2022.

This trend will further accelerate, as over 50% of respondents believe there will be increased demand for ESG-integrated investments post covid-19 pandemic.