Carlyle busts open the door on social-linked sub lines

The ESG-linked fund finance facility market hit another milestone yesterday when The Carlyle Group announced what it says is the first-ever ESG-linked private equity credit facility tied entirely to social key performance indicators, and the largest ever such line in the US.

The three-year $4.1 billion revolver’s pricing is linked to the firm’s goal of having 30 percent diverse directors on the boards of Carlyle-controlled portfolio companies within two years of ownership; a goal it set for itself in 2016. All of the firm’s US corporate private equity funds are eligible to draw on the line, with targets ratcheting up over time to the 30 percent goal, according to Megan Starr, Carlyle’s global head of impact, and Kara Helander, chief diversity, equity and inclusion officer, speaking with Private Funds CFO. The discount is applied on a fund-by-fund basis. Carlyle will regularly assess and assure the data in conjunction with their lenders.

The firm estimates that the line may save the firm $5 million-$6 million in interest expense.

Bank of America was lead on the deal, as well as global sustainability agent.

In 2016, 38 percent of majority-owned US corporate private equity portfolio company boards had at least one diverse member. Since then, that has risen to 88 percent overall, and 100 percent in Carlyle’s flagship US Buyout funds. In 2020, the firm expanded the goal to 30 percent of all directors in corporate private equity controlled companies globally by 2023.

“Having a target makes a difference,” said Helander. She noted that last year, 56 percent of the new directors added to the boards of controlled companies held for at least two years were diverse.

The idea for the line originated with Carlyle, according to Starr, who said the firm had in the last year done a number of ESG-lined financings at the portfolio company level. “As we were coming up for renewal for this line of credit, we got the idea that this is a really helpful way of saying, ‘We know these dimensions of business excellence are indicative of better performing businesses.’”

“We were thinking of the range of metrics on diversity initiatives that Kara has led on, it’s been something that she has been working really hard at in the last few years. We have good data and we knew the trajectory we were on,” said Starr. So Carlyle came up brought a term sheet to its lending syndicate and negotiated terms, including ESG KPIs.

The diversity initiative has proven to make its own business case. “We know that our portfolio companies that have at least two diverse board members have 12 percent faster annualized earnings growth than our companies that don’t have any diverse directors,” said Starr. “We already have the financial rationale. This adds another layer of financial incentive to push further impact.”

Carlyle anticipates using the structure again in other regions, Helander added. And Starr has “a lot of things in the works in terms of using ESG metrics more broadly,” she said.

“We love the idea of using the tools of private capital to further incentivize progress on environmental issues, and I think this is just the beginning for us,” said Starr, adding that the firm has done more than $6.5 billion in ESG-linked financings so far, and is open to doing much more.

The firm estimates that its ESG-linked financings completed thus far will save it more than $15 million dollars.

“We’re using every tool we can to drive progress, and it’s exciting: when you start engaging people within the organization in that effort, opportunities like this manifest, and we’re taking full advantage of them,” Helander said.