Questions & Answers
Which material sustainability matters must be identified and assessed in private equity structures having general and limited partners?
- Materiality assessment
- private equity structures
- general and limited partner
Background
Private equity (PE) structures usually have a general partner (GP) and limited partners (LPs). GP refers to the PE firm that manages a private equity fund. These funds are usually set up as general partnerships with the third-party investors being the limited partners and the PE firm acting as the GP. In addition to raising the funds and administering the daily operations of the fund, the GP is responsible for identifying and closing on investments in portfolio companies of the private equity fund, assisting the portfolio company management teams in maximising value and liquidating investments so distributions can be made from the partnership to the LPs. LPs are the ones who have arranged and invested the capital for the private equity fund but who are not really concerned about the daily maintenance of the fund, whereas GPs are investment professionals who are vested with the responsibility of making decisions with respect to the investments.
To answer the question above, it is assumed that neither the GP nor the LPs consolidate the portfolio company in their respective financial statements as neither of them financially control the portfolio company.
ESRS 1 paragraph 62: ‘The sustainability statement shall be for the same reporting undertaking as the financial statements.’
ESRS 1 paragraph 63: ‘The information about the reporting undertaking provided in the sustainability statement shall be extended to include information on the material impacts, risks and opportunities connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (“value chain information”). …’
Answer
General and limited partners of private equity structures must identify and assess material sustainability matters in their own operations and in their value chain.
If neither the general partner nor the limited partner/s consolidate the portfolio company/ies in their respective financial statements because neither of them exercises financial control over the portfolio company/ies, then impacts, risks and opportunities of the portfolio company/ies are not part of the own operations of the general partner nor of the limited partner/s for the purposes of the sustainability statement (See also Implementation Guidance EFRAG IG 2 Value Chain chapter 2.3 From own operations to value chain).
The general partner typically provides management services to the portfolio company/ies through the private equity fund. Therefore, in the absence also of financial control, the portfolio company/ies are considered business relationships in the general partner’s value chain. Accordingly, the general partner shall identify and assess material impacts, risks and opportunities connected to the portfolio company in its downstream value chain.
The limited partner typically provides funds for its investments in portfolio companies. Please refer to Implementation Guidance EFRAG IG 2 Value Chain: FAQ 2: Are financial assets (loans, equity, and debt instruments) considered business relationships that trigger value chain information?
To note: More detailed guidance is expected in future sector standards. ID 285 Asset managers, investment entities, scope of sustainability statement deals with a question about the scope of the sustainability statement assuming that the portfolio company is controlled by the asset manager / the holding company.
Relations
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5.1 Reporting undertaking and value chain | |
5.1 Reporting undertaking and value chain | |
5.1 Reporting undertaking and value chain |