The Challenge of Responsible Investment

Private Equity International

By Adam Le

The next generation of investors are increasingly interested in how returns are made, rather than just how big they are, partner David Jeffrey tells the IPEM conference in Cannes.

The next generation of investors will measure performance by sustainable returns in addition to purely financial ones, according to StepStone’s European head.

“Private markets started in a post-war era when making money was the be all and end all, but the next generation is far more interested in how we make returns, rather than just how much,” David Jeffrey, a partner who leads the firm’s activities in Europe, said at the IPEM conference in Cannes on Tuesday.

“This is something that governments, mediators, regulators and others are all waking up to.”

Private markets managers will increasingly be asked to demonstrate their commitment to responsible investing, Jeffrey said. Measuring external internal rates of return – such as the UNPRI’s sustainable development goals – in addition to traditional internal IRRs, will provide an overall, all-inclusive rate of return.

“This really is the challenge for the future,” he added.

Private equity offers fewer quality sustainable investing strategies and managers to choose from than most other asset classes, according to research from Morgan Stanley published last year. Just 36 percent of asset owners, including public and private pensions, endowments and sovereign wealth funds, identified these opportunities in private equity, compared with 65 percent in public equities and 50 percent in real assets, the investment bank’s Sustainable Signals report found.

Still, private equity managers are the largest single group of asset managers among the more than 1,800 signatories of the UN-supported Principles for Responsible Investment.

A growing number of firms are launching impact funds in recognition of LP demand for sustainable investments, including KKRPartners Group and Hamilton Lane, according to PEI data.

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