Eiffel Investment Group claims its impact debt fund is the first private debt fund to explicitly link the cost of borrowing with the achievement of positive sustainability impact, in the form of 'impact covenants'.

The Paris-based investment manager, which has about €2 billion in private assets under management, also says it is the first such fund to have received the LuxFlag ESG label. The independent Luxembourg Finance Labelling Agency provides the label to "reassure" investors that investment products incorporate environmental, social and governance (ESG) criteria throughout the investment process.

Eiffel's fund raised €250 million at first close in December, from a group formed mainly of French insurers, including AG2R La Mondiale, Aviva France, L'Auxiliaire, Groupama, Harmonie Mutuelle, MACIF, MAIF, Natixis Assurances, Securex and Suravenir.

The fund, which currently has commitments worth €280 million, is expecting to reach about €400 million at second close in July. It aims to grow this to €500 million next year.

It aims to provide financing with a maturity of about six to eight years, mostly to small and medium-sized, non-listed companies, in the form of "sustainability-linked" loans and bonds.

The fund managers do not apply a sustainability label to individual transactions. Instead, they cite the fund's attainment of the LuxFlag ESG label as proof of its sustainability credentials.

Eiffel aims to ensure the positive impact of its investments by integrating what it calls an 'impact covenant' in the legal framework of its deals. These covenants are pre-agreed with each borrower, and include impact 'key performance indicators' (KPIs) against which the borrower will be judged each year for the life of the financing.

The rate at which the interest rate increases or decreases each year, based on the achievement or otherwise of the impact covenants, will vary for each deal, depending on factors such as the size and business activity of the borrower, the expected returns and the size of the potential positive impact. However, it would typically be about 10% of the overall return, according to Marie Bursaux, a co-manager of the fund.

The model borrows characteristics of the sustainability-linked loan and bond markets, in what is a first for a private debt fund, Bursaux said.

The fund aims to provide financing to 20 to 25 companies in the next three years, alone or alongside other investors, in individual deals worth between €10 million and €100 million.

In December, the fund agreed its first debt financing, with Bertrand Développement, part of large French restaurateur Groupe Bertrand, to help it acquire the Léon de Bruxelles chain of restaurants in Belgium. The €40 million 'impact bond' includes three impact covenants:

- Create at least 3,500 new jobs over the six-year life of the financing – a figure that represents the equivalent of about 10% of its existing workforce, Bursaux said;

- Ensure that at least 95% of the jobs created are permanent; and

- Ensure that at least 94% of the entire workforce, including employees recruited prior to the financing agreement, is employed in permanent jobs.

Eiffel provided half of the €40 million, alongside the other investors, who were La Banque Postale Asset Management, Schelcher Prince Gestion, Céréa Gestion and AG2R La Mondiale.

The fund's managers expect to close four new transactions in June or early July, with companies operating in various sectors including healthcare, pharmaceuticals, logistics, telecommunications, and food & beverages.

"The fund is the first of its kind," Bursaux added. "What is interesting is that, often when we lend to these companies, we are not the only private debt fund involved in the deal. Since we started this impact covenant, many of our competitors have followed us. They say, I want to follow what Eiffel does on the impact side, whatever you negotiate with them, I want the same thing. We're very happy because we think that we're setting the trend and hopefully in two or three years time, what we do will be the new normal."

The model also attracted the attention of the French state. In January, the Ministry of Labour invited representatives from Eiffel and limited partner investors in the fund to its offices to formally recognise their contributions. EF