Fundraising in private equity in recent years was shaped by myriad forces, including ESG considerations. In this Q&A with Claudia Arango, we explore private equity fundraising trends in Latin America after 2020. Claudia is the Managing Partner of Exagon Impact Capital, with a career of more than 20 years in private equity and a focus in the Latin American region. Considering Exagon's stated tandem goal to create lasting impact while achieving superior returns from investments, we discussed with Claudia how ESG considerations have shaped the traditional private equity environment.
1. Would you share with us a bit about Exagon Impact Capital and your perspective on what the fund is looking to accomplish? Why is the focus on ESG so critical at the moment?
Exagon Impact Capital (“XIC”) is a private equity firm with a mission to achieve superior returns in infrastructure investments in Latin America and the Caribbean while simultaneously achieving a positive impact. Through our XIC Infrastructure Alpha Plus strategy, we seek to maximize value creation opportunities while providing structured downside protection. XIC draws upon extensive collective industry experience. The investment team combines its network and complementary skill sets, uniquely enabling efficient risk mitigation with a private equity approach to value-creation opportunities throughout the life of portfolio investments, ultimately driving alpha creation for investors. Integrating ESG into the investment decision and project execution processes of the fund is key for XIC to mitigate risks and uncover opportunities to create long-term value.
Our team members have been investing successfully in power and infrastructure in Latin America for over 20 years, under strict ESG guidelines. This was always done not simply because it is the “right thing to do” but because it is the way to best manage an asset to ensure risk management, value creation, and eventual exit. Every infrastructure project, regardless of how renewable or “green” it is, has a social and environmental impact which needs to be addressed from the onset to create a sound investment. Instilling “best practices” on governance similarly ensures optimum management which creates value, allows for efficient oversight, and makes a portfolio company more attractive for future acquisition. So, for the Exagon team, the focus on ESG is nothing new. What has changed in the market is the increased sentiment from investors that their investments should realize attractive returns and make a positive impact. Historically there was a stigma that including ESG as part of the investment strategy meant sacrificing returns, but empirical evidence has shown the opposite. Sound ESG inclusion in the process creates better returns. This dynamic of Limited Partners requiring attractive returns, coupled with bestin-class institutionalized ESG management and reporting, will only become more prominent as all stakeholders increasingly demand it.
2. From your perspective, how do you think ESG considerations have permeated the traditional relationship between LPs and GPs in private equity funds? Have you seen any regional differences?
Traditionally, LPs for the most part have been focused on returns and ESG was never part of the conversation. LPs hoped that the ESG component was being managed properly, but it was never a focus of the conversation between GPs and LPs. As mentioned, there was a sentiment that ESG and sustainable investment resulted in subpar performance; that somehow there was a sacrifice embedded in paying attention to ESG matters. Today, LPs are more aware that this is not the case and GPs with real ESG experience can achieve attractive returns and, in sectors like ours, achieve higher risk-adjusted returns. Clearly, what we have seen in emerging markets is that impact, sustainability, and ESG have a greater impact as compared to similar projects in developed markets. We see greater ESG requirements coming from investors in Europe and the ANZ (Australia, New Zealand and the Asia Pacific) regions. This is because more investors in these regions are subject to net-zero commitments, have well-defined ESG functions within their organizations, and adhere to stricter disclosures stemming from regulation and societal pressures. We are aware that LPs in Asia and the Americas have started to pay increasing attention to ESG and we expect them to catch up to the rest of the world.
3. Have you seen an increase in LPs requiring ESG information from the fund itself and portfolio companies, as well?
Yes. ESG considerations have “raised the bar” for GPs. In today's world, it is hard to imagine a presentation deck, brochure, or annual report that doesn't include a discussion of ESG. To this end, there is a lot of “greenwashing” going on in the market. There is a lot of soft marketing discussion on ESG management. The serious players in the space, as we believe we are, are creating tangible ways to report positive impact and ESG to their LPs and broader stakeholders. At XIC, we have developed, with the support of several international development finance institutions, a methodology to score our investments on the ESG and impact fronts, based on the UN Sustainable Development Goals (“SDG”). In this way, we can report to our LPs and other stakeholders a tangible way of evaluating the ESG component of our investments. We have definitely seen an increase in investor interest in reporting ESG and this understandably drops down to a reporting requirement from the underlying portfolio companies.
4. You are making waves in your field which, unfortunately, continues to be very male dominated. Based on your journey, what advice would you give to other women who are either founders or looking to enter the private equity field?
I have successfully worked in the private equity industry for over twenty years. Unfortunately, as is the case in other fields, I often found myself the only woman in the room working on a transaction or serving on a board. Things have improved over the years, but we still have a long way to go. I've always felt that there is no substitute for experience, so that has always been the focus for myself and my advice to others. I think it is important for any woman interested in starting as a private equity manager or joining the sector to go for it. It is a very fulfilling career, and they don't have to choose between having a successful career and a happy family. I am testament that you can have both. Of course, there are trade-offs you have to be ready to accept, as in any other career, but they are worth it. Finally, I think it's also very important to find a group of female or male partners and colleagues who are focused on meritocracy and contributing value. Afterwards, the experience will carry the way
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