Sustainability-linked loans are on track to become the market standard in private debt transactions as they are a compelling tool to promote impact investing strategies, said Julien Paycha, head of corporate private debt at Amundi, during a breakout session at the BAI Alternative Investor Conference in Frankfurt this week.
The market share of sustainability-linked loans has increased threefold between 2020 and 2021, he said, adding: “I can see a future not too distant where most if not all private debt transactions will be issued as sustainability-linked loans.”
Private debt strategies can be impactful through sector exclusion, due diligence, setting contractual targets, and sustainability linked-loans can help in this respect, through engagement, reporting and data.
Amundi’s real assets portfolio – worth €62bn out of a total of €2trn – are invested in private debt (€8.5bn), real estate (€41.9bn), multi assets (€10.4bn), private equity (€1bn), infrastructure (€427m), and impact investing (€440m).
In the private debt space it targets the mid-market pure senior debt segment with transactions in corporates with EBITDA south of €40-45m.
The French asset manager has three corporate private debt funds that have either an ESG strategy or an impact strategy in which “last year alone almost 70% of the investments incorporated ESG indicators – they were effectively sustainability-linked loans”, Paycha said.
“If we look back at the transactions we closed at Amundi in 2021 we see that on average the sustainability-linked loans incorporated two or three KPIs [key performance indicators],” with the Sustainable Development Goals (SDGs) being the main KPI chosen, he said.
The Amundi Senior Impact Debt IV, one of the firm’s impact investment funds, has collected €725m so far since inception last September to reach a target of €1bn by the end of this year and it is seeing increased interest by insurance companies and pension funds, Paycha told IPE after the conference session.
It is the first impact fund – an article 8 fund under the Sustainable Finance Disclosure Regulation — with portfolio companies that have to conduct a carbon footprint assessment, and an action plan aligned with the Paris Agreement on all three scopes to reduce their carbon footprint.
“The fund will chip in and cover part of the costs of a carbon footprint assessment […] and we expect that portfolio companies update their assessments every year,” he said.
According to Paycha, private debt is well suited for an impact strategy in mid-market transactions as it involves a close relationship with the management of a company and is a long-term instrument.
However, he pointed at research by Phenix Capital, a Dutch impact investing consultancy, showing that private debt impact strategies account for 20% of the impact universe, and impact strategies in 2020 accounted for almost €5bn with 20% dedicated to Europe.
“At the moment impact investing is small, but I believe that it is about to become much bigger because it matters,” he said referring to the Paris COP21 commitments and the recent spike in greenhouse gas emissions.