When it comes to ESG, private credit requires an approach that is distinctly different from public market asset classes, whether it be fixed income or equities. While each borrower must be evaluated on a case-by-case basis, certain broad considerations need to be kept in mind.
For instance, it is an illiquid asset class, with a typical life cycle of three to five years and there is little or no ability to trade in and out of loans unlike the broadly syndicated markets. Additionally, as debt holders do not own shares of the company or sit on company boards, they cannot directly change company behaviour. Such factors greatly increase the importance of conducting ESG due diligence up front and getting it right.
Middle market companies are also often at an earlier stage of their development compared to large, publicly traded companies—which means that while they are committed to addressing ESG issues, they tend to have more limited resources. Lenders also need to ensure that their views on ESG align with both a company’s management team and its sponsor, given that private equity sponsors play a critical role in influencing ESG practices of many middle market companies.
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