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Private Credit 

Alessandro Albano

Sammy Cole

Nishan Srinivasan is a partner, head of origination of Ambienta Credit, and a member of the Ambienta Credit investment committee. He started his career with Salomon Brothers, and later spent 25 years at Credit Suisse, where he was global co-head of leveraged finance origination.

Fabio Ranghino is a partner and head of strategy and sustainability at Ambienta and is based in Milan. Prior to Ambienta, he was a management consultant with Value Partners where he developed experience on a wide range of sectors and industries as industrial goods, automotive, luxury goods and energy.

Nishan and Fabio share what a sustainable investment in private credit means for them, from the origination going through its lifecycle. They also discuss why in their view a stronger relationship with borrowers and portfolio companies is sometimes more relevant than meaningless docs.

1. After the Russian invasion of Ukraine, ESG investments faced some setbacks as European countries turned to fossil fuels to face the energy crisis. However, sustainable investments seem to be back on investors’ agenda, what does this mean for the private credit markets?

Ranghino: First and foremost, we should acknowledge that while the terms ESG and Sustainability are often used interchangeably, in our view this causes confusion and, more fundamentally, dilutes the essence of their meaning.

At Ambienta we are very clear – sustainability and ESG are two entirely different concepts, we will turn to what we mean by that further below.

The effects of the war in Ukraine are not a fair representation of a long-term trend. For temporary reasons, there was a need for supply of resources to get the economy going, relying on fossil fuels. But the underlying decarbonisation and decoupling of the European economy from fossil fuels is still ongoing and that is evident from oil and gas volumes in Europe, and volumes are more about the industrial story than the values which are affected by prices. Look at electricity for instance, prices are negative in many countries in Europe due to oversupply of renewables, and there isn't a stronger incentive to switch to renewable or electrified solutions for factories than a negative value.

The opportunity for credit is big, whether you invest in technology or you lend capital to companies adopting new technologies. Credit is perfectly positioned to address this need.

2. Has Ambienta’s strategy changed in this evolving environment?

Ranghino: It has not. Since our founding almost two decades ago, Ambienta has been investing exclusively in companies whose products and services contribute to environmental sustainability by either using resources more efficiently or reducing pollution.

Our approach defines sustainability as the ‘What’ and ESG as the ‘How’ in the context of analysing companies and investment opportunities. 

Sustainability means: “What is the business model?”. It looks at whether the services or products of a business improve resource efficiency and pollution control in a way that is meaningful and measurable for the long-term.

ESG on the other hand means: “How is this business managed?”. It is effectively a risk management tool assessing good governance and sound business practices.  We invest in the What a company does and we manage, as equity holders or lenders, the How a company operates in line with our ESG in Action program.

This is a crucial differentiation. We would never invest in a company whose business model is not fundamentally environmentally sustainable even if ESG criteria (the “How” it operates) are met or can be improved.

The opportunity is bigger than ever and the underlying trend that sustainability drives competitive advantage and delivers performance is very visible. Our portfolios in public and private equity have an organic revenue growth of 8-10% and this trend supports profit increases across all portfolios.

3. Can you give our readers a practical example of how you integrate ESG through PC investments?

Ranghino: While we mandate ESG due diligence to understand how the company operates across their environmental, social and governance issues, that to us is standard practice, it is good governance and not a differentiating factor.

What is more crucial, and we really put emphasis on, is providing our borrowers with access to our private equity expertise in running ESG improvement processes, by offering engagement with our internal ESG team and free of charge scope 1 and scope 2 emissions calculations. It’s a two-way engagement over the lifespan of the loan to make sure that we monitor any issues identified during the due diligence process and that the company acts proactively and shows an improvement. We can’t impose anything as a lender, but we can proactively influence and stimulate actions and improvement by providing expertise.

This could be achieved through ratchets as well, but we don't want to overestimate the role of ratchets. The way these are set is sometimes not as effective, depending on where thresholds are set.

We want to be recognised as a partner more than anything else. Where we do identify areas of improvement through the diligence, we like to be able to engage with the companies (potentially through ratchets), but we do believe that a constructive relationship is more powerful than a ratchet in isolation.

4. When originating a loan, do you set margin ratchets or specific ESG-linked covenants at the fund level? Are there other options to ensure the company maintains specific ESG KPIs?

Srinivasan: Our thesis is that we want to invest in environmental champions, and we want to partner with like-minded companies and sponsors and owners.

There is a place for ratchets in the market, if they can be meaningful. For example, when we discuss ratchets with borrowers we typically like to talk about two-way ratchets rather than only downward only ratchets. The market has somewhat taken ratchets to a logical extreme where they are simply used for marketing purposes. A 5bps ratchet on something which the company will easily achieve is something that we're not particularly interested in. Ratchets should be useful, and if there are no ratchets that's also fine as long as there is alignment, and the company has the same intentions as we do.

5. Which steps do you take to make sure ESG KPIs are respected over time and how do you engage with an issuer over the lifecycle of a loan?

Ranghino:: We draw evidence from the initial relationship and we partner up with like-minded sponsors and management teams. It shouldn't be perceived as a negative but rather than as an added value to have Ambienta as a partner, who understands the underlying trends of the industry, the regulatory trends that the companies are facing, and have expertise and experience of people within the team that can provide support and make life easier for a company. We engage and support companies in the journey where there is the need to improve ESG performance.

Srinivasan: We want to work with like-minded people who have the same interest as us. Clearly the market is moving in the same direction. So documentation, for example, has typically increased standard ESG clauses.

As an example, the deal we closed with Aqseptence, a leading global provider of water filtration and separation technologies, they care deeply about sustainability. So we were able to, very early on, agree that this was something that was in their interests and our interests as well. On the ESG front, we are working directly with the company on implementation of ESG principles. So the one thing we're very proud of is that in addition to being able to partner with companies with our capital, we're able to give them advice.

6. What advantages do you think private credit has compared to other fixed income solutions?

Srinivasan: One of the key attractions of private credit is that you can build long term relationships with your borrowers. You're invested for seven years and typically don't sell the debt. You're also typically a meaningful lender, if not the entire lender. It means that you can build a long-term, close relationship.

The syndicated market obviously has a wonderful place in the market and is an attractive source of financing for people, but investor concentration limits mean that typically borrowers don't get to have deep and long-term relationships with lenders.

7. Do you think that ESG in private credit is catching up to ESG in syndicated markets? Is there anything that could block its growth?

Srinivasan: The syndicated market was probably quicker on an overall macro basis to embrace ESG. The private credit market has caught up very quickly, and a number of our peers who are generalists now have ESG questionnaires and these have become fairly standard in the market. But that's the macro point. On the micro point, when private credit takes ESG and sustainability seriously, it goes deeper. That's tautological for us because we're a sustainability-focused fund. Syndicated markets have a broader reach, but I don't really see syndicated investors who hang their hat on sustainability with a focus on it as a core tenet.

Ranghino: The syndicated loan market or the more visible bond market draws ESG integration more from the public equity or the public market, which tend to be more of a tick the box exercise because they tend to be much farther away from the asset. This is true to the extent that certain instruments were challenged, whether they were really eligible, whether they're driving really any change or any meaningful improvement and without questioning the substance. Private credit is in a better position to influence assets, which ultimately, is what ESG is pursuing in the broader sense.

8. What key characteristics do you look for when deciding whether to include a company in the Ambienta credit portfolio?

Srinivasan: We're very focused on credit analysis as we’re old-fashioned credit investors and that is always on top of our agenda.

From a sustainability perspective, we have three phrases which are: it has to be measurable, meaningful and a driver of long-term growth of the business. It's super simple. We need to be able to measure the environmental impact, using one of our metrics that our team of engineers, led by Fabio, look at how to measure, it has to be meaningful, and it has to be relevant to the growth of the business and the company.

9. Any recent example of successful investment and one that didn’t go as planned?

Srinivasan: Earlier this year Ambienta, right at the formation of our fund, acted as a lender in the acquisition of Aqseptence, a leading global provider of water filtration and separation technologies headquartered in Germany, from a private equity fund called GFI – a subsidiary of Oaktree. Aqseptence offers solutions for treating or recycling water and wastewater in industrial, urban and agricultural sectors. Through its Filtration & Thickening Systems (FTS), the company can reduce water consumption by up to 90% in the highly intensive mining industry.

Aqseptence FTS achieves this by providing sludge thickeners and filter presses to process the leftover of mining processes containing rocks, water and hazardous chemicals. This results in clean water, of which up to 90% can be reused, and dry stack non-hazardous tailings that can be safely managed. This process is critical to reducing the risk of environmental and water pollution from tailing slurries and potential leakages. Aqseptence contributes to further adaptation of dry stacking processes in mines, which currently stands at only 6% (i.e. 94% of mines today do not apply this process and disperse water in the environment without filtration), thereby supporting the industry on its path towards a sustainable transition. Based on Ambienta’s proprietary Environmental Impact Assessment methodology, in 2023 Aqseptence contributed to 11.9m cubic metres of water saved, equivalent to the annual water domestic consumption of 65,000 families.

With respect to our turning down deals, we are in the privileged position to say there are many deals in the mid and low market which are relevant for our mandate. When deals did not not progress, the reason is perhaps two-fold: we want to make sure that we're quite purist in terms of the environmental sustainability of a business, and so we tend to be cautious on investments where we felt that wasn't a driver of growth and defensiveness of the business.

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9Questions — Nishan Srinivasan, Fabio Ranghino, Ambienta — Sustainable private credit means partnership

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