Bonderman: ESG vital to today’s GPs

Fund managers stuck in the past and only focused on financial engineering ‘aren’t going to be around for much longer’, the TPG co-founder said at PEI's Responsible Investment Forum.

Private equity firms can do well by doing good. That was one of the founding principles of TPG and has over the years become more significant – and institutionalised – within the private equity industry, according to firm co-founder David Bonderman. 

Speaking at PEI’s and the PRI’s Responsible Investment Forum in London, Bonderman recalled how different things were when he got his start in private equity in 1982. 

Bonderman: ESG is front and centre

“Financial restructuring was more of the original model. That is not the case for the successful firms anymore and certainly not the larger size firms,” he said, noting TPG had 65-70 operating partners charged with monitoring environmental, social, governance (ESG) and other factors throughout the life of the deal. “You have to be more involved.” 

His advice for firms still primarily focused on financial engineering and restructuring? “You are not going to be around for much longer.” 

The industry has, by and large, however, become more focused on ESG issues, he said. “GPs are more aware of these issues than a decade ago – or even five, six years ago. I can’t imagine that there’s any one of the major players that isn’t aware of the PRI initiative. And I can’t imagine anyone being insensitive to this.”

Private equity’s model already lends itself well to good ESG practices, he said. “In the private equity world we are by and large control investors. In the West it is typically full control and in emerging markets it’s maybe a minority position with additional control. As a result we can make things happen in a way the hedge fund world cannot – they are maybe investors until next Thursday or for the next 15 minutes. We are [long term investors] and if we don’t like something, then we will change it,” he said.

We can make things happen in a way the hedge fund world cannot – they are maybe investors until next Thursday or for the next 15 minutes. We are [long term investors] and if we don’t like something, then we will change it.

David Bonderman

Bonderman noted however that investing with ESG principles in mind does not necessarily makes life any easier, nor does it lead to black-and-white investment decisions. “Typically, like anything else in life, it’s all shades of grey and you have to navigate through.” 

When evaluating a potential investment that may have some red flags in terms of ESG, he said, “The question is: Can you make it better? Is it still worth investing and doing something to make it better? Or do you simply say ‘I don’t want to touch this’?” 

TPG has come cross many situations like that, he said. “We bought a company [Hilex Poly] which is a manufacturer of plastic bags for groceries. Plastic bags obviously have an environmental impact and the question was: should we invest or should we not invest?”

Despite the fact that at least one city – San Francisco – has banned their use in shops, Bonderman said the firm “concluded that plastic bags weren’t going away and we could make [the company and its products] better at least by using much more recycled materials” and getting Hilex Poly’s large accounts like Wal-Mart to adopt such products.

Asked whether implementing ESG principles in emerging markets was more difficult, Bonderman quipped that “everything is more difficult” in emerging markets and thus may require different levels of diligence. 

He also noted that it was tougher to give weight to some ESG issues during the global financial crisis. “In a crisis, you tend to focus on the crisis,” Bonderman said. “When there’s a fire, you go and put the fire out. You are not going to worry whether the floor is made of asbestos – you will worry about that later. There’s no doubt that during the height of the crisis – in ‘08, ’09 – people were less focused on these issues, but that’s long gone,” he said.