ESG Incidents and Fundraising in Private Equity

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 relationship limited partners (LPs). LPs trade off E&S concerns with financial
cost of breaking relationships, 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 E&S externalities.

Keywords: Private equity, fundraising, buyouts, limited partners, ESG, sustainability

JEL Classification: G10, G24, M14