The Role of Sustainability in Private Equity’s Introduction to America

    Money TreeAre sustainability initiatives relevant to the media attention private equity fund managers seem likely to face this year?  At MSP, we certainly think so.

    As the presidential primaries heat up, the Republican field is reaching for ways to take front runner Mitt Romney down a peg.  One of these ways seems to be attacking Mr. Romney’s tenure at private equity fund Bain Capital, which Newt Gingrich recently compared to “rich people figuring out clever legal ways to loot a company.”

    While Romney refers to his time with the group as one focused on job and value creation, his Republican opponents are accusing him of corporate piracy while Obama strategist David Axelrod is already referring to Romney’s private sector resume as a glass jaw.  As Charles Riley of CNNMoney noted, “…The new hot-button campaign issue is private equity.”

    Most Americans are not very familiar with the private equity sector and will be hearing about it for the first time during this year’s election cycle and it is likely that the tone of presidential campaign politics will lead to fund managers being portrayed in a negative light.  Private equity’s public debut, so to speak, may cause reputational problems.

    Media attention on the private equity sector is no surprise to anyone following the news lately – but how is sustainability relevant to this trend?

    Such reputational problems can harm funds’ social license to operate, something we considered during last year’s Occupy Wall Street movement.  While ‘OSW’ was somewhat damaging to the reputation of large commercial banks, attacks on the private equity sector could potentially reduce the effectiveness of government relations efforts or even the hurt relationships with the large institutional investors who are limited partners in private equity funds.

    So what can private equity managers do to protect their reputations?

    From our perspective, funds should focus on how they create value for the companies they acquire.  There are now some impressive reference cases of environmental initiatives which create financial benefits while helping the planet, such as the Kohlberg Kravis and Roberts Green Portfolio Program or Carlyle’s EcoValuScreen.

    These initiatives provide a strong positive message to share with external stakeholders while, more importantly, driving value creation across portfolios. In the KKR example, the Green Portfolio has generated over $365 million in avoided costs for the fund’s companies while supporting a positive message which can be shared with limited partners during the fundraising process.  Additionally, KKR companies that do not currently participate in the Green Portfolio are clamoring to get in as they see the value which the program creates – something that acquisitions targets may notice and appreciate.

    Bottom line: private equity managers should prepare for more public exposure and sustainability initiatives can support a positive image even as they help to increase returns.

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