Private Equity: Unlock Value through Sustainability

Responsible Investment Management Drives Value Creation

Private equity firms 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 firms are working harder than ever to create value amidst rising resource costs and increased LP scrutiny, leading firms 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 ESG?

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 firms 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 firms, 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 focused on initiatives such as resource efficiency, achieved an estimated $917 million in financial impact across 25 participating portfolio companies since 2008.
    • 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.

 

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: Conduct customized workshops to equip investment professionals with knowledge of ESG management in private equity, ESG issues and their impact on portfolio companies, and how to address ESG requests from LPs and other stakeholders
      • Firm-Level ESG Strategy Development: Develop a framework and implementation strategy that aligns to the firm’s drivers, goals, and investment processes
      • Communications and Disclosure StrategyCommunicate ESG management strategy to LPs through placement memorandums, ESG reports, and case studies
      • ESG Due Diligence: Assess and determine materiality of ESG management to value creation plan, describe top risks and opportunities with recommended initiatives, and create a summary for investment committee (IC) decks and memos
      • ESG Value Creation during Ownership: Identify and assess ESG risks and opportunities in relevant portfolio companies by: (1) Targeting operational cost savings through resource efficiency initiatives across facilities, logistics, production, and packaging processes, among others; (2) Analyzing ESG risk such as supply chain social compliance performance that pose strategic threats to business continuity and brand; and (3) Developing communication strategies and tools that address sourcing, packaging, carbon emissions, and waste in a manner that increases the desirability of a portfolio company’s product and strengthens reputation amongst customers, investors, regulators, and employees

For additional information, please visit our Services Suite page.

      What Does this Mean for Your Firm?

      There are many benefits to developing an ESG strategy.  If you have questions or would like to share ideas on how these issues relate to your firm, we encourage you to contact us to schedule a complimentary ESG Strategy Consultation.

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