Abstract

We present novel evidence on how environmental and social (E&S) incidents affect the capital-raising ability of Private Equity (PE) firms. PE firms with E&S incidents in portfolio companies are less likely to fundraise and raise smaller subsequent funds. The decrease in capital commitment does not seem related to fund performance; instead, it is driven by E&S concerns of limited partners (LPs). LPs trade off E&S concerns with divestment costs, implying a weaker impact on large, top-performing PE firms. The threat of “exit” by E&S-concerned investors incentivizes PE firms to exert “voice” and mitigate negative externalities associated with PE ownership.

Authors

Teodor Duevski, HEC Paris
Chhavi Rastogi, International Finance Corporation, World Bank Group
Tianhao Yao, Singapore Management University