Private Equity
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.
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