ESG-linked private equity compensation now a priority for majority of fund investors

12 April 2023

Environmental, social and governance (ESG) considerations have a key role to play in private equity investment practice, according to “The Cost of Playing the Game: The Brackendale Private Equity LP Sentiment Survey H1 2023 in Partnership with IQ-EQ” published today. The report reveals that 52% of limited partner (LP) fund investors consider that private equity general partner (GP) compensation should be directly linked to ESG goals. Decarbonisation is the most popular target listed by LPs, who underline the importance of having tangible key performance indicators (KPIs) relating to specific strategies and portfolio companies. 

The report canvases opinion on private equity compensation levels from leading insurance firms, pension companies, family offices, and fund-of-funds across Europe and the US. A key struggle that a significant majority of LP investors are faced with is the lack of influence when negotiating fees with GPs, with surveyed investors reporting an average 3.76/10 satisfaction rate. 

While 65% of LPs surveyed deemed the standard 2:20 private equity fee model to be still relevant, the remaining 35% thought that it had become obsolete.  A chief criticism was that the 2% management fee should be paid to fund managers regardless of fund size or performance, with LPs suggesting that fees be tailored to the size and strategy of the fund.  

When asked in which single area LPs would wish to see improvement, 30% of LPs responded that they would prefer to have lower management fees. Another 30% of those surveyed wanted to see an increased capital commitment from GPs, while just under a quarter of respondents would prefer to have better transparency in their communications with their GPs. The remaining respondents named areas like reduced or tiered carry, or lower/fixed fund expenses. 

Fay Margo, CEO, Brackendale Consulting: “What we are seeing is that despite scepticism amongst certain circles in the US, the trend overall is that institutional investors are becoming increasingly attentive to ESG criteria, ensuring they are in line with fund targets and strategies. It’s heartening that so many LPs mentioned that GP compensation should be linked to the push to net zero.”  

Justin Partington, Group Head of Funds and Asset Managers, IQ-EQ: “As firm believers in ESG and the use of technology to streamline the investment process, we are glad to see LPs in agreement. With a majority of LPs wishing their GPs to invest in new technology, a further quarter proposing the outsourcing of admin and middle-office solutions, and many demanding better procedures for collecting and reporting ESG data, we are seeing a clear push to improve the LP-GP relationship through innovation.” 

TDA 23