Private Equity: Unlock Value through Sustainability
Responsible Investment Management Drives Value Creation
Private equity funds own a significant portion of U.S. and global companies and leverage their roles as owners to drive value creation within their portfolio companies. In an era when funds are working harder than ever to create value amidst rising resource costs and increased LP scrutiny, leading funds from KKR in the U.S. to Doughty Hanson in the U.K. are focusing on responsible investment and management practices to boost returns.
Why Focus on Sustainability?
Our report on sustainability in private equity produced with the Environmental Defense Fund (EDF), among the first of its kind and the only to survey pension funds and other limited partners, highlights many of the drivers and best practices increasing focus on sustainability in the industry.
MSP’s clients and the leading general partners (GPs) across the private equity industry have shared the top drivers of their responsible investing platforms:
- Satisfy Increasing Environmental, Social, and Governance Expectations from Limited Partners
The most sought after institutional investors from CalPERS to PGGM now seek more active management and disclosure of environmental, social, and governance (ESG) issues from the private equity funds in which they invest. Increasing scrutiny from investors and other stakeholders of GP ESG performance is an important motivator of GPs taking action and communicating their practices with their investors in many forms.
- Boosting EBITDA through Resource Efficiency Initiatives
The McKinsey Global Institute Commodity Price Index has risen 147% during the last decade, entirely eliminating the gains from 100 years of productivity enhancement. While commodity prices are cyclical, they expected to continue to increase. Successful businesses today must focus on resource efficiency alongside capital investments. Leading funds, including KKR, Apax Partners, Oak Hill Capital Partners, and others, are leveraging resource management reviews to optimize efficiency in facilities, logistics, IT, and manufacturing operations. KKR’s Green Portfolio Program, which focuses on such resource efficiency, announced in 2012 that it had realized over $365 million in avoided costs.
- Understand and Manage Non-traditional Risks
Effective fund managers are adept at examining business opportunities and risks during due diligence. While these reviews cover environmental, health, and safety compliance, there is now a strong business case for reviewing ESG factors beyond compliance during transactional due diligence. Such reviews can reveal opportunities for resource saving initiatives, exposure to commodity inflation, or supply chain risks.
Other benefits clients cite include reputational benefits amongst acquisition targets as well as keeping the private equity asset class in favor with the institutional investor community.
To learn more about drivers of responsible investing initiatives and sustainability at private equity funds, we encourage you to download our private equity brochure.
How MSP Can Help
With extensive experience collaborating with financial firms and their portfolio companies, MSP can help you to quickly identify the responsible investing strategy elements which are most relevant to your company and then build a platform to unlock this value. Specifically, we can help you with:
- Leadership Capability Development: Equip your investment professionals with knowledge of evolving resource and environmental business drivers and how to profit from them
- Portfolio Efficiency Review: Analyze your current portfolio, identify cost saving opportunities, and prioritize projects with highest returns
- Portfolio Efficiency Execution: Implement opportunities identified in Portfolio Efficiency Review with skilled project management of initiatives ranging from facilities retro-commissioning to energy optimization of IT networks
- ESG Management Platform: Develop management systems to consistently harvest value from environmental, social, and governance management throughout the investment cycle, from due diligence to exit
- Communications and Disclosure Strategy: Communicate ESG accomplishments to limited partners, government, and acquisition targets through placement memorandums, citizenship reporting, and case studies
What Does this Mean for Your Fund?
There are many benefits to developing a responsible investing strategy. If you have questions or would like to share ideas on how these issues relate to your company, we encourage you to contact us to schedule a complimentary Sustainability Strategy Consultation.