ING recently closed the world’s first sustainability improvement capital call facility for Quadria Capital Fund II, where the interest rate is pegged to the sustainability performance of the fund.
The US$65 million three-year revolving facility is the first of its kind in the global fund finance industry which Preqin estimates is currently worth US$400 billion.
Quadria Capital Management is a private equity sponsor headquartered in Singapore focusing on the healthcare sector in developing Asia. It counts the world’s leading development finance institutions, asset managers and global impact funds among its investors. Quadria Capital has raised a substantial portion of its US$500 million Quadria Capital Fund II and expects to close the fund by this year end.
In 2017, ING was the first financial institution globally to launch the concept of a sustainable loan when it collaborated with Royal Philips on a 1 billion euro syndicated loan that had the interest rate coupled to sustainability performance and rating.
That same year saw ING pioneering this concept of a sustainability improvement loan (SIL) in Asia, when it worked with Wilmar International to convert part of its US$150 million existing revolving credit facility into an SIL. ING has closed four SILs so far in Asia and 66 such deals globally.
Quadria’s innovative facility will peg the interest rate to a set of environmental, social and governance (ESG) performance targets on its Fund II investee companies and investment portfolio. The interest rate is thereby linked to the fund’s sustainability improvement through its investment activities.
The set of ESG metrics is based on key performance indicators provided by B Analytics and further mapped to Quadria’s own internal ESG framework which follows the United Nations’ Principles for Responsible Investment (PRI), and an independent materiality assessment. Performance of the fund against these metrics will be assessed annually by B Analytics and if predetermined targets are met, the interest rate will be reduced in the following year.
“As a bank we aim to promote socially responsible behaviour in the funds and fund managers we finance, so that we may influence ESG improvement in portfolio companies by incentivising their shareholders,” says Herry Cho, ING’s head of sustainable finance in Asia.
Cho says that ESG criteria is rapidly becoming a key consideration for mainstream global institutional investors and asset owners allocating money into private capital. “Of the UN PRI signatories’ US$90 trillion AUM globally, private capital currently accounts for only 6%. Therefore, the potential for private capital to become more ESG focused is quite significant,” she notes.
“It was a meeting of minds when ING first brought this up with us. Quadria Capital is a firm focused on a dual mandate of positive investment returns with constructive social impact by increasing and improving accessibility and affordability to healthcare in South and Southeast Asia,” says Abrar Mir, managing partner at Quadria Capital.
ING’s head of clients and sectors APAC Eddy Henning explains, “Private equity sponsors will increasingly link their performance to sustainability metrics for two reasons: first, the returns of the asset class has been generally out-performing others with increased allocations from the international investor base, and second, these investors have caught on to the fact that contrary to popular belief, an ESG strategy can enhance returns as well as unlock new access to capital.
“We see sustainability improvement products highly replicable not only in private equity and healthcare, but also in real assets, infrastructure, or financial inclusion amongst others,” he adds.