At Private Equity International's Responsible Investment Forum in London this week, there was much talk about how to take the ESG debate to the next level – to better incorporate these considerations into the investment process, and to make the benefits of it more tangible to the skeptics.
One of the principal ways to address this issue, it was suggested, was to make it an intrinsic part of the operational value creation piece: to show how ESG outputs can actually boost the value of a company, either in terms of bottom-line cost savings, new revenue lines or overall brand value.
For instance, TPG managing partner Jim Coulter, who delivered the keynote address at the event, talked about how his firm had seen EBITDA exit multiples increase for companies that TPG had taken 'from red to green’– i.e. from a poor environmental position to a good one.
This highlights an important point: the centrality of GPs' value creation capability to any discussion about private equity these days. We've even seen that in the recent row over fees: the SEC specifically flagged the evolving ways in which managers retain and reward operating experts as one of its key bugbears with the industry's current set-up.
In our view, this is no bad thing. Anything that emphasises the primacy of a manager's efforts to build better companies can only be good for the industry's broader reputation. And as far as LPs are concerned, this focus on value creation ought to mean that managers with a proven track record in this area should come to the fore – who, as we've argued before, are surely the managers best placed to deliver consistently good returns across the cycle. Rather than relying on a rising market, they can make their own luck.
David Russell, co-head of responsible investment at the Universities Superannuation Scheme, said at yesterday's conference: “Private equity is not secretive equity … It seems to be part of the culture not to tell anyone about anything, but there are some great stories to be told by the sector [around] how it's integrating ESG into the management of its assets. And I think that story should be told better than it currently is.”
We think the same is true of value creation more generally. That's why two years ago we instituted our Operational Excellence awards, with the intention of highlighting and rewarding the most impressive operational improvement stories in private equity.
The idea is simple: we split the industry into four size categories across our three main regions (Europe, Asia and the Americas), and ask GPs to submit their best stories from the companies they've exited (or partially exited) in the last year. We then convene an independent panel of esteemed judges in each region, and ask them to decide which of the entries best demonstrate what an ambitious and successful value creation plan can achieve. Last year, KKR, CVC, Headland and Nordic were among those to be recognised.
Entries for this year's awards are open now. Click here for details of how to apply; all the finer points are there, but essentially, if you've enjoyed a good exit in the last 12 months that you think is a good illustration of the value you can add as an owner/operator, we want to hear from you before July 18.