A private equity fund with a climate focus managed by Morgan Stanley Investment Management is capturing the attention of Danish pension funds — largely due to its unusual fee structure.
Laerernes Pension, Hellerup, Denmark; P+, Pensionskassen for Akademikere, Frederiksberg; and AP Pension, Copenhagen, recently made commitments to the 1GT Fund that invests in companies in sustainable food and agriculture, the circular economy, energy and transport sectors.
The fund invests in companies that aim to remove or avoid a collective 1 gigaton of carbon dioxide-equivalent emissions from the atmosphere.
Aside from its sustainable investment objective, the strategy has one unique feature: Its fee structure takes into consideration achieving the climate target as well as investment performance.
The 1GT team will tie half of its incentive compensation — in the form of carried interest — to the underlying investments collectively achieving one gigaton reduction or avoidance in carbon dioxide emissions, said Vikram Raju, a managing director, head of the 1GT platform and head of climate investing for the private credit and equity division of MSIM, in an emailed comment.
"If we fail to hit this goal, we lose half our carried interest. One gigaton avoidance/reduction in CO2-equivalent emissions is a very clear target and we analyze the impact created by our portfolio companies very rigorously, very conservatively, and it will be signed off by external parties on an annual basis," he added.
Mr. Raju said that investors also have the option of using a carbon analytics consultant to assess the calculations to conclude if the 1GT climate target is met.
The fund held a first close on May 17 at $500 million.
Commenting on factoring the fee structure into the decision to invest in the fund, Tobias Friis, head of alternatives investments at the fund said in an email: "We found among other factors the cost (management fee) and the carry structure with the climate target very attractive."
Mr. Friis did not disclose the size of the pension fund's commitment to the fund but said that Laerernes Pension anchored the fund. Laerernes Pension had 146 billion Danish kroner ($21 billion) in assets as of Dec. 31.
"The team and their carve-out track record was also attractive and the opportunity to (act) as an anchor investor to have a large impact on the terms was a big lever for us," Mr. Friis added.
Mr. Friis said the 1GT strategy was the first it had seen using climate targets as part of its fee structure, but said he has since seen similar carry structures in private equity impact funds.
Separately, P+ invested over 500 million Danish kroner in the fund.
"As an anchor investor in the fund, we were involved early in the process, and we have, among other things, been a sparring partner in defining which types of companies we thought the fund should focus on. Both for the sake of achieving an attractive return in relation to the risk and in relation to preventing CO2 emissions. We have a clear expectation that the fund can deliver on both returns and sustainability," Kare Hahn Michelsen, incoming CEO of P+, said in an emailed comment.
Also, AP Pension, Copenhagen invested €75 million ($81 million) in 1GT Fund. AP Pension has about €20 billion in assets. Spokesmen were not available to comment.
