Loan Note: Countering the ESG backlash; BoE highlights lending concerns

Why regulation might protect ESG from the backlash in the US. Plus: the Bank of England has worries around private equity and debt; and Europe's worsening credit conditions. Here's today's brief for our valued subscribers only. 

They said it

“There are fresh concerns about the global economy powering down as data from China’s service sector underlines how tepid the post-pandemic recovery has become”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, the UK financial services company

First look

In the spotlight: ESG is polarising opinion (Source: Getty)

The ESG battle rages on
The anti-ESG stance being adopted in some US states is considered in this month’s cover story. What it draws attention to is competing narratives.

From states where there are traditional energy industries to protect comes the argument that investors should only be considering potential returns when making investments – anything else is an irrelevant distraction. From the pro-ESG side comes the attempt to frame ESG considerations as a crucial element of risk management.

This week, the UK Sustainable Investment and Finance Association – representing banking heavyweights such as Barclays and JPMorgan – urged the UK government to provide clearer guidelines around the role of fiduciary responsibility in ESG considerations. This followed a PWC survey that revealed 74 percent of investors cited the management of ESG risks and opportunities as a critical factor in their decision-making.

ESG is an area where further regulation is supported by those in favour of consistent standards, the minimisation of liability risks and the implementation of responsible investing practices. It would help to cement the status of ESG as a vital part of the investment decision-making process, regardless of the growing backlash.

BoE careful
The Bank of England has issued a warning over the proliferation of private credit and more esoteric financing strategies within the private markets, according to our colleagues on Private Equity International.

In a Monday speech at UK Finance, published on the central bank’s website, executive director Nathanaël Benjamin said that “any adverse macroeconomic outturn” in the US could be felt across all asset classes and products in some way, particularly within private equity and private credit.

“We are mindful that as interest rates have risen and traditional leveraged financing markets have stuttered, a clear trend toward illiquid private equity financing and private credit has emerged,” he said. “Some firms are growing rapidly in this space, and with that has come a significant increase in complexity, as firms not only lend to portfolio companies, but also to fund investors, underlying funds, asset managers and everyone in between.”

Benjamin said the BoE sees a risk that firms underestimate their aggregate direct and indirect exposures to underlying counterparties and connected collateral. “[That is] not a good place to be should credit conditions begin to deteriorate, or should those counterparties be feeling the squeeze of the tighter monetary environment through tighter access to liquidity,” he said, noting that the bank intends to “closely monitor private asset financing”.

The bank’s warning feels particularly timely given PE’s burgeoning appreciation for facilities such as NAV financing, which this year are increasingly being relied on as an alternate path to liquidity at a time when many LP coffers are bare. Private credit firms also are seeing this year as an opportunity to gain ground in sponsor lending, as traditional lenders retrench in some markets.

It seems Benjamin’s advice won’t be falling on deaf ears. Panellists at our Seoul and Tokyo forum last week noted that private debt managers, for their part at least, were having difficult conversations with sponsors about the appropriate use of leverage, and becoming more strict on covenants. They did note, however, that there was still room to improve for deals on the larger end of the spectrum.

Tough credit conditions in Europe
S&P Global Ratings predicts in a report (login required) that the European speculative grade corporate default rate will rise from 2.8 percent in March 2023 to 3.6 percent in March 2024 as tightening credit conditions reduce access to, and increase the cost of, speculative grade issuance.

The rating agency said that, so far this year, two-thirds of speculative grade issuance has been by higher-rated ‘BB’ issuers – indicating that weaker issuers are already struggling to access markets.

“The contrast between the highest and lowest rated corporates could not be starker, and worsening credit conditions will have an unequal impact on European corporates,” said Paul Watters, head of corporate research for Europe at S&P Global Ratings.

Credit conditions have tightened as central banks seek to bring inflation under control and restore price stability, which is not expected to happen in the Eurozone until 2025. With more restrictive rates, banks will become more risk-averse, funding costs will rise and the focus on credit quality from investors and lenders will increase.

The report noted that the economic cycle is also weakening, although a deep recession is not expected in the Eurozone.


Fund leaders survey: we’d love to hear from you! 
This year’s Fund Leaders survey is up and running and we want to hear from you! Submit your form to us by 17 July and you will get a complimentary copy of the results when they are published at the end of July, as well as entry into a prize draw to win a $250 Yeti Cooler.

Topics covered in this year’s survey are as follows:


  • Fundraising (market sentiment, factors impacting performance, performance predictions)
  • Sources of capital (private wealth capital, digital fundraising platforms, geographic distribution of investors, continuation funds)
  • Headcount and AI (changes in headcount, priority areas for increasing headcount, AI implementation across firms)
  • ESG and DE&I (factors driving ESG adoption, link between ESG and performance/value creation, DE&I in portfolio companies)
  • GP stakes (GP stakes interest, objectives and considerations in selecting buyers)

CVC closes third CLO equity fund on $800m hard-cap
CVC Credit has closed its latest collateralised loan obligation fund on its hard-cap of $800 million, which will support more than $10 billion of global CLO issuance for the firm’s performing credit platform.

The fund, CVC CLO Equity III, will invest in equity tranches of CVC-managed CLOs issued in both the US and Europe. It is substantially larger than its predecessor vehicles and brings CVC’s total fundraising for the strategy to $1.66 billion.

The fund is expected to support more than 20 new CLO issuances for CVC Credit and has already funded 11 transactions with an aggregate value of $4.8 billion.

Gretchen Bergstresser, managing partner and global head of performing credit at CVC Credit, said: “In times of market volatility, the ability to control the pace of new CLO issuance, rather than relying on third-party CLO equity is a real advantage and already in the year to date [the fund] has enabled us to price six new CLO vehicles with an aggregate value of nearly $3 billion.”

CVC has significantly expanded its credit business in recent years through both CLO issuance and private credit funds, growing assets under management by 82 percent since the end of 2020 to $41 billion.

German trade body goes digital
The Association of German Lending Platforms, a trade body for fintech lending, has elected to change its name to the Digital Lending Association.

The association, which was established in 2019 and has 27 members, said the renaming was a result of “market development and our positioning activities in recent years”.

“Digital lending has developed into an attractive asset class in the private debt segment worldwide and especially in Europe,” said Constantin Fabricius, the trade body’s managing director.

Having been founded by four platforms investing only in senior loans, the association says it now represents the “entire spectrum” of digital debt financing and its instruments such as tokenised bonds and securitisations. The membership also includes specialist service providers in areas such as digital onboarding and receivables management.

The association is claiming to fill a gap in Europe for the representation of digital lending within the non-bank lending sector.

LP watch

Institution: Los Angeles Fire & Police Pension System
Headquarters: Los Angeles, US
AUM: $28.8 billion
Allocation to private debt: currently 0%

The Los Angeles Fire & Police Pension System is considering the approval of a new private debt plan as recommended by the pension fund’s investment consultant Stepstone.

In August 2020, the board voted to approve a 2 percent target allocation to private debt as a result of an asset allocation study. Subsequently, in January 2023 the LAFPP board hired Stepstone as its private debt consultant with the goal of creating new exposure to the asset class.

US pension funds have been increasingly drawn to the allure of private debt in a period of economic uncertainty, with high yields and increased diversification of their portfolio making for an attractive proposition.

Stepstone’s suggested pacing plan would see LAFPP target $139 million in commitments for 2023, and $261 million in commitments for 2024. The pacing plan would aim to see LAFPP generating net cashflow by 2030.

The private debt plan would see LAFPP target a range of different private debt strategies.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing