ESG Incidents and Fundraising in Private Equity

We present novel evidence on how environmental and social (E&S) incidents affect the capital raising ability of Private Equity (PE) firms. Using a sample of global buyout investments, we find that PE firms experiencing E&S incidents in their portfolio companies are less likely to raise a subsequent fund and the subsequent funds are smaller. The relative size of subsequent funds is 9%-12% smaller for PE firms experiencing above-median number of E&S incidents. The decrease in capital commitment does not seem to be related to fund performance, instead it is driven by E&S concerns of limited partners (LPs). LPs trade off their E&S concerns with cost of divestment and as a result the impact of E&S incidents is weaker for high reputation PE firms. PE firms relying on E&S-concerned LPs in turn engage with their portfolio companies to manage E&S risk. The threat of “exit” by E&S concerned investors incentivizes PE firms to exert “voice”.