Carlyle’s Horbach: LPs are after more than just returns

The firm’s co-head of US buyout, Sandra Horbach, said LPs are showing strong preference for funds focused on ESG and other factors – prioritising this even over high returns.

The days of limited partners seeking only top-quartile private equity funds are long gone, according to The Carlyle Group managing director and co-head of US buyout Sandra Horbach.

Speaking at Harvard Business School’s Venture Capital & Private Equity Conference in Cambridge on Saturday, Horbach told the audience that there are many other factors that LPs consider nowadays when committing to a fund, in addition to simply the financial performance.

“LPs are really looking for a partnership with responsible investors,” she said. “They care about ESG [Environmental, Social and Governance considerations], compliance, diversity, low volatility.”

These issues have been rising in importance in the due diligence questionnaires by LPs screening fund managers for potential commitments, and one that has become a centralised topic across the industry.

For example, the US’s largest public pension fund, the California Public Employees’ Retirement System, adopted a five-year strategic plan on ESG in August, identifying six initiatives to support its efforts in sustainable investing. One such initiative specifically centred around private equity, focusing on private equity fee and profit-sharing transparency through the industry adoption of the Institutional Limited Partners fee reporting template released earlier in 2016.

In March, a group of 77 endowments and asset managers launched the Intentional Endowments Network, a peer-to-peer network to support ESG investing by endowments. The network included organisations such as Arizona State University, UBS Asset Management and Perella Weinberg Partners.

Horbach added during her speech that due to the rising prominence of these issues in private equity, LPs would much rather put a larger chunk of capital, such as $1 billion to $5 billion to a fund manager generating a 14 percent internal rate of return (IRR) and incorporating these responsible elements, rather than commit $200 million to a fund producing more than 20 percent IRR but without such factors included.

David Rubenstein, co-founder of Carlyle, had made similar remarks back in October in an interview with Private Equity International. “In the early days some firms maximised returns at the expense of ESG issues. Investors wanted the highest rate of return and didn’t put any pressure on the firms in terms of environmental issues, jobs offshoring… Maybe they should have, but they didn’t,” he said at the time.

Horbach, who participated in the World Economic Forum’s various working groups on gender diversity in private equity, became the first and only woman out of 35 heads of various investment teams at Carlyle, she noted in her speech, adding that while firms are making progress, there is still a long way to go. She became the US co-head of buyouts in July, after leading the consumer and retail team in New York, as reported by PEI.

At Carlyle, she said it was initially not encouraging to be the only woman at the partner level, but the firm has made a lot of progress since she joined in 2005, and now 22 percent of those holding positions at principal level and above are women, and more than half of the new hires coming to the firm for permanent positions represent diverse backgrounds.