The two reporters from Private Equity International arrive at TPG’s opulent Carlton Gardens offices on one of those weirdly cold, wet and overcast early-summer afternoons that Londoners have had to get used to in recent years.
We’re due to meet co-founder David Bonderman for a conversation mainly about the firm’s approach to ESG-compliant private equity investing. According to people who know him well, the TPG co-founder is a non-sceptic when it comes to climate change, and so given our agenda, the gloomy skies above the city provide a suitable-seeming backdrop.
Ever the globetrotter, Bonderman has flown in from California to meet with colleagues and investors, and also for an on-stage interview at Private Equity International’s and the UN PRI’s Responsible Investment Forum the following day. To prep for the event, he’s brought along TPG’s in-house ESG advisors Edward Norton and Elisabeth Lowery, and together with European fundraiser Magnus Christensson and public affairs chief Adam Levine, we all meet in the boardroom to talk through the game-plan for tomorrow’s interview.
THIS ISN’T BOX-TICKING
Bonderman has a well-earned reputation for being interesting on pretty much any subject, and ESG is no exception. A former student of archeology who became involved in the environment while doing excavation work in the Grand Canyon, he says his views on the matter have shaped the TPG culture right from the start in 1992.
Likewise with regards to social considerations: the firm made it a point of principle at the outset not to invest in industries such as guns and tobacco, and continues to follow this rule to the present day. As Bonderman puts it: “Things that kill people, we try to stay away from.”
To be sure, Bonderman thinks the ESG acronym’s usefulness has its limitations: its bundling of what inherently are three distinct sets of issues – Environmental, Social and Governance – risks obscuring the fact that each of them poses its own kind of challenge to investors and therefore requires skilled management in its own right. And notably in his view, some of them are more difficult to handle for private equity than others.
Of the three, according to Bonderman, the governance issue should be the easiest nut to crack. Private equity, even when it doesn’t own a majority stake in an asset, is by definition expected to exert strong influence over the business. So when a governance problem arises, a capable manager should be able to resolve it without much difficulty: “The governance part of ESG, to my thinking, is actually sort of semi-irrelevant to our industry: we rarely invest where we don’t have some say in what’s happening. And if the CEO is doing a bad job running the company and we own the company, we get someone else to do it; we shouldn’t have to think twice about it.”
With the environmental and social dimensions of private equity investing, things are less straightforward. “You have all kinds of issues arising, and with each one you need to take a careful look and decide whether you have problem; if so, is it insurmountable or can you economically fix it?”
To illustrate how diverse these problems can be, Bonderman touches on a variety of social and environmental challenges TPG has addressed in its vast investment portfolio over the years: working with fast-food chain Burger King to create a sustainable disposal process for oil, fatty acids and other residue; enabling plastic bag manufacturer Hilex Poly to overhaul its recycling systems so that its products could remain an environmentally viable alternative to paper; helping casino operator Caesars minimise its energy consumption (and therefore its electricity bill), and so forth.
Addressing these kinds of portfolio scenarios is as much an exercise in risk removal as it is a potential value creation opportunity: “The point is not to walk away every time you discover an ESG problem. It’s like any other thing you consider: if you think you can work with the environmental community and get something done, and other guys can’t because they’re not sensitive or they don’t care, or because you have some long-term understanding, that constitutes competitive advantage – no different from having a lower cost of capital or a better management team. This isn’t box ticking – it’s part of the process.”