Private equity firms have the choice to work with local fiduciaries to become market makers on ESG, according to Kurt Summers, treasurer of the city of Chicago.
Speaking at the third annual PEI Responsible Investment Forum in New York on Tuesday, Summers said cities including Chicago, New York, Denver, San Francisco, Houston, Washington, DC and others are part of a movement by local fiduciaries to take a lead on ESG issues, and investors will increasingly push for more transparency from private equity firms.
“The level of transparency will have an impact on your portfolio exits and ability to raise capital in the future,” he noted.
Summers, who took office in December 2014, led Chicago’s ESG development and implementation project. Since then, the city has tripled its annual earnings from $49.7 million in 2014 to $156.1 million in 2018.
Chicago built its own proprietary ESG platform that identified around 170 key factors that were material to financial performance or to Chicago’s constituents, and then it assigned those factors a weight as part of the construction of an overall ESG score. The platform was integrated into investment decision-making in the third quarter last year, Summers said.
The treasurer called for greater transparency from private equity firms. The overwhelming belief from the investor community is that private equity firms are being dragged into transparency “kicking and screaming” and that something is being hidden.
“It should be 100 percent the opposite. You can be the arbiters of truth,” Summers said, adding that it’s “ironic” that data disclosure is often the biggest issue in private markets because private equity firms are the owners of their portfolio companies.
“You have the ability to really dictate everything from A to Z, have complete transparency and insight into data that we can’t even get into public companies; you have the ability to influence outcomes,” Summers said.
A strong set of ESG metrics can drive higher market demand and higher quality of earnings, which, all things equal, generally lead to better valuations, he added. Whichever exit route a private equity firm ends up taking with a particular portfolio company, the ultimate buyer will be looking at ESG issues.
Summers urged private equity firms to take lessons from their portfolio companies in healthcare, insurance and banking. “None of them wait until public officials, regulators or regulatory bodies dictate terms for them. Nor should you,” he said.
Summers voiced more concern about private equity firms’ sustainability in terms of income distribution internally than about the fees paid to them, adding that it’s important to examine whether a firm is distributing its wealth to junior partners and to the management teams of its portfolio companies. Firms will not be able to sustain executing their secret sauce if junior partners leave to start a better, high-quality firm, he said.
“Greed is not a sustainable strategy.”