The impact of development mandates (ESG) on private equity fund performance

Abstract

The major theme of this research has been to understand the impact of ESG requirements, or development mandates, on the performance of private equity funds.Semi-structured interviews were undertaken with participants from private equity funds, investors and advisory firms. The research interviews included a number of broad themes: the effect of ESG requirements on private equity fund returns, obstacles to the realisation of ESG objectives, availability of suitable data, the effect of ESG on investment choices, monitoring of ESG performance, and key indicators and methods to evaluate ESG.The key research findings of the study include: ESG has a positive effect on private equity fund performance, in terms of risk management and improved valuation at exit; in terms of ESG, governance still receives the greatest attention and focus; two areas that hamper the achievement of ESG objectives are the lack of skills and resources, and the weakness of regulatory frameworks in emerging markets.Based on the research findings, recommendations have been made to further improve the impact that ESG objectives can have on fund performance. These include: development of suitable standards and management systems; integration of ESG into risk and business management processes; and improved tracking and quantification of ESG development impact.