Guideline published by Redington and PRI details strategies for managing private debt responsibly
Investment consultancy Redington, in partnership with the Principles for Responsible Investment (Pri), has published a groundbreaking report offering practical tools and strategies for investors to engage borrowers and private equity sponsors in private debt. The guide aims to help private debt investors effectively practice stewardship, promoting long-term value and sustainable practices among the companies they finance.
The report defines stewardship in the asset class as multifaceted, combining unique challenges with the potential to influence outcomes. Lenders in the private debt market face significant barriers to stewardship that do not necessarily exist elsewhere. These challenges include timing of engagement, borrower responsiveness, and quality of data available.
To address these challenges, the report recommends four main tools: providing resources and training, maintaining ongoing engagement with sponsors and borrowers, incorporating sustainability-linked margin ratchets and covenants, and participating in advocacy or collaborative initiatives.
Sharing resources and training with borrowers and sponsors is crucial to building capacity and understanding of sustainable practices. Ongoing engagement through regular dialogue and relationship-building with private equity sponsors and borrowers can influence outcomes. Sustainability-related margin ratchets and covenants, which link loan pricing or terms to the borrower’s ESG or sustainability performance, incentivize better practices. Advocacy and collaborative engagement, where investors work together or with industry bodies, promotes better stewardship standards within private debt markets.
The report stresses the value of integrating stewardship into every stage of the investment lifecycle to enhance both sustainability outcomes and portfolio value. It explores the "spectrums of influence" investors can have, noting that factors such as market context, transaction structure, timing, and the nature of the borrower all shape the ability to drive change.
The report is a result of collaboration with the PRI and a wide range of global practitioners. Leading practitioners are already driving meaningful change through their stewardship activities in private debt. The research underpinning the guide was led by Edwin Whitehead, director of sustainable investment at Redington, based on interviews with fund managers and investors, reflecting practical, real-world insights.
The private debt market has expanded significantly in the past 15 years. As the market continues to grow, the need for effective stewardship practices becomes increasingly important. The report offers guidance on how private debt investors can effectively practice stewardship to promote long-term value and sustainable practices among the companies they finance.
The guidance applies both to general partners (GPs) managing private debt funds and limited partners (LPs) investing in them, with additional sections tailored to their roles. The report highlights opportunities and challenges for investors engaging with borrowers, lenders, and sponsors in the private debt asset class. It emphasizes the role of stewardship in reducing risk, supporting value creation, and improving borrowers' creditworthiness.
Railpen, a significant player in the investment landscape, has boosted its stewardship to safeguard member outcomes, but no specific details about this action are provided in the report. The report concludes by stressing the importance of stewardship in the private debt market and the potential for investors to drive meaningful change through their activities.
[1] Redington and Principles for Responsible Investment (Pri). (2021). Embedding stewardship practices in private debt: A guide for investors. [online] Available at: https://www.pri.org/resources/reports/embedding-stewardship-practices-private-debt-guide-investors/ [Accessed 10 Mar. 2023].
[2] Redington. (2021). Embedding stewardship practices in private debt: A guide for investors. [online] Available at: https://www.redington.co.uk/insights/embedding-stewardship-practices-in-private-debt-a-guide-for-investors/ [Accessed 10 Mar. 2023].
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