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HomePaperESG Incidents and Fundraising in Private Equity

ESG Incidents and Fundraising in Private Equity

16 February 2024
Authors: Tianhao Yao (Singapore Management University), Teodor Duevski (HEC Paris) and Chhavi Rastogi (International Finance Corporation, World Bank Group)
Presenter: Tianhao Yao (Singapore Management University)
Abstract:

We present novel evidence on how ESG incidents affect the capital-raising ability of Private Equity (PE) firms. Using a sample of global buyout investments, we find that PE firms experiencing environmental and social (E&S) incidents in their portfolio companies are less likely to raise a subsequent fund and 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 negative effect is stronger for less reputable PE firms. We do not find similar effects for governance (G) incidents. The decrease in capital commitment does not seem to be related to performance, instead it comes from departure of ESG-concerned limited partners with whom the PE firm had a past relationship. Following an incident, PE firms hire more employees with an ESG background and experience fewer incidents in their new investments.

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