According to New Private Markets, some investors are less than enthusiastic about at least one innovation in sustainable investments:
“New York State Common Retirement Fund, one of the largest and most influential investors in sustainable private markets, is not a fan of funds where the GPs’ [General Partners’] carried interest is linked to impact performance.
‘… we are also keen on avoiding unintended consequences. And one of them is this notion of impact-linked carry and tying performance to achieving non-financial factors,’ said [Andrew Siwo, the pension systems’ director of sustainable investments and climate solutions], one of our 50 influencers in sustainable private markets. Some GPs – particularly those with a sustainability of impact focus – have tied a portion of their carried interest to the achievement of extra-financial goals, such as ESG or impact targets. This is designed to assure investors and target company management teams that the GP will not sacrifice its stated sustainability goals for the sake of additional financial return…
‘What this does is it opens the door for malperformance to be attributed to the desire to achieve non-financial objectives when impact is not tied to the thesis. And so those are products that we find unappealing,’ said Siwo. ‘We want to make sure we are isolating the GPs’ entire activities on that fiduciary duty.’”
Carried interest is a performance-based reward that serves as an incentive to maximize investment returns – the better an investment performs, the more money the manager makes. In this case, however, the pension is concerned about paying investment managers more when non-financial benchmarks are achieved or exceeded. That is a valid point – increasing direct costs without commensurate asset value growth does little more than burden those investments with higher management fees. While investment managers may think that is great, it probably is not the best strategy to attract and retain investors – private or otherwise.
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