This year’s flagship Private Placement (PP) conference in Miami had a noticeable sustainability emphasis. Participants explored how this trend is affecting different aspects of the market – including investment behaviour, product structuring and treasury decisions. This article provides you with a market pulse, exploring some of the key areas of discussion during the conference.
There are no homogeneous ESG investment strategies in the PP market. The buyer base is at different stages of maturity: multiple mid- to larger-sized US accounts are lacking meaningful practices (mostly a qualitative part of investment decision), while certain, more advanced European and global accounts have already developed dedicated sustainable finance frameworks and investment targets. Particularly for investors managing third-party client money, it has been imperative to develop an ESG approach. In doing so, the general focus has been on proper integration, avoiding a simplistic “saint and sinner” list or to be seen to conduct “window-dressing” approaches.
Several investors are finding ESG impact weightings between industry groups (such as reducing exposure to fossil fuels and cruise companies) and within sectors. One example: industrial real estate is easier than office real estate given the typically less energy-efficient nature of the current stock of the latter asset class.
A broad-based reluctance remains amongst investors towards offering any meaningful greenium, and there’s indeed no evidence yet that this has filtered down from the public to the private market. Investors would generally prefer to see penalties for non-ESG compliant companies or offerings. This may not always be the case currently given the scarcity value of certain offerings (e.g. gas pipelines).
Several PP investors referenced an interest in wanting to support transitioning sectors. This could either be through financing with clear disclosure and reporting requirements, or “hard-wired” sustainability-linked target and coupon adjustments. The latter structure has its limitations however, as several transitioning borrowers noted that sectoral key performance indicators (KPIs) are still in development, and insurance investors don’t want to compromise the clarity of the PP returns given matched funding requirements.
Various funds are being set-up to support affordable housing as well as SME lending in rural areas. Funds focused on the US market, typically include native Americans and veterans as additional target populations. When issuing PP debt, these typically offer minimum social reporting data.
Infrastructure and project finance have, for a considerable time now, supported the development of renewable energy generation. Hence, the bullish outlook remains for this market segment, also based on the economic attractiveness versus some of the more polluting energy sources (e.g. coal).
Pre- and post-issuance
Amongst some of the largest PP investors there is now a drive to standardise the types of ESG questions they ask borrowers. The dedicated Private Placement Investors Association ESG working group was referenced by various market participants as a useful starting point in this regard.
ESG-related investments are placing pressure on the credit profile of certain sectors, most notably real estate. To manage this risk, several borrowers have come to market for amendments looking to exclude retrofit and related environmental expenditures from the covenant calculations.
The debate around the extent to which the Republican party control the Congress and/or Senate could reduce momentum behind ESG amongst US PP market participants. Even some speculation could become politicised the wrong way, such as for example Republican authorities withdrawing funds from “liberal” investment firms. The majority view, however, appears to be that ESG practices will increasingly become mainstream across the US capital markets.
The emergence of more accessible ESG data is likely to facilitate the embedding of greater sustainability transparency in private placement transactions. Several data providers already offer dedicated solutions for the market.
This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.
This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.
NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.