Does private equity have a social value?

Does private equity have any inherent social value? Clearly firms are taking a more explicit interest in social issues these days, as part of their broader ESG efforts. But some would still argue that a fund’s sole responsibility is to maximise financial returns to investors, regardless of the social externalities. 

In an attempt to answer this thorny question, UK-based mid-market group LDC (the regionally-focused investment arm of Lloyds Banking Group) recently enlisted the help of an unlikely bedfellow: Big Issue Invest, the social investment arm of UK-based homelessness charity The Big Issue.  

“In our direct investing activities, we focus on firms that are intentionally looking for social impact – but we believe that mainstream business and finance has a role to play,” explains Sarah Forster, director of development at Big Issue Invest. “So the purpose of this research was to think about how private equity firms might look at their activities through a social value lens.” 

The outcome? A report that assesses all 129 of the portfolio companies backed by LDC between 2003 and 2013 against a series of social impact metrics. 

“We wanted an approach that matched up with LDC’s activity in the market – a sort of social X-ray of their normal market decisions – so they could demonstrate why their activities had a social value,” says Mark Hepworth, head of research and policy for Big Issue Invest.  

The research team set out to examine how LDC’s investment activity was promoting the broader social goal of creating a more balanced UK economy. Deals were ‘scored’ in 12 different categories across five different policy areas: investing through the recession; investing across the regions; investing in disadvantaged areas; investing in high-growth SMEs; and investing across sectors. And the good news for LDC was that it scored above the benchmark in all but one of the 12 categories (and was level in the other one). 

One obvious issue is that since this particular ‘scorecard’ has been designed specifically for LDC, it inevitably reflects well on that sort of private equity model. So while it gives LDC a helpful way to talk about its social impact, it won’t be so helpful to other firms with different models (i.e. most of them). 

That said, there’s no reason why different firms couldn’t come up with their own scorecard, says Hepworth. “You wouldn’t necessarily have to have the same criteria; it can be adapted and customised to the operations of different investors.”  

The bigger question, arguably, is whether something like this would ever change behaviour. Hepworth admits the jury is still out on this. “The power is in whether you start using it as part of your criteria for making investment decisions, as opposed to just judging decisions you’ve already made.” 

LDC will clearly be the test case here. But it’s certainly talking the talk; managing director Tim Farazmand has recently taken over as chairman of the British Private Equity & Venture Capital Association, and has promised to use his new platform to promote the social investment cause.  

Either way, it’s easy to see the potential advantages for GPs of creating this kind of scorecard, if only as a helpful marketing and PR tool. Clearly there will be times when private equity investment has a positive social impact, particularly in terms of business growth and job creation. So any kind of framework that helps firms to articulate that has to be a good thing – especially if it helps to win over one or two of the industry’s critics in the process.