For Ardian, 2016 was a busy year. Among highlights, the Paris-based firm closed a record-breaking $14 billion secondaries vehicle; launched a North American direct investment business; raised €2.6 billion to invest in infrastructure; consolidated its real estate management team; and continued to build its private debt offering. It also raised an eye-popping total of €5.5 billion to invest in small and mid-cap businesses in Europe.
The firm’s head of CSR and responsible investment Candice Brenet explains why partnering with its portfolio companies is key to the firm’s success.
Ardian seeks to share ownership, responsibility and profits with its portfolio companies. How does that translate into value creation?
Ardian has always been very sensitive to social matters. That’s the rationale behind the profit-sharing mechanisms we have implemented with our portfolio companies and within Ardian. Since 2008, we have shared roughly €17 million with 7,800 employees of 14 portfolio companies. We have not measured the impact in financial terms but there is huge employee enthusiasm for it, and that’s a strong sign. Also, this approach is attractive to entrepreneurs. In 2016 alone, our mid-cap buyout team completed nine investments in Europe, a very competitive environment. The fact that Ardian is known to really partner with portfolio companies and that we pay huge attention to supporting good practices and sharing profits with employees contributed to that.
And at the firm itself?
We have also put in place profit-sharing mechanisms at Ardian that go far beyond our regulatory obligations. That attracts young talent. We also enjoy a high level of staff loyalty that is a key advantage over the long term.
Are LPs more demanding regarding ESG?
We have a large LP base of more than 560 globally. Their interest in ESG matters is strong and they ask a lot of questions. Being able to demonstrate that we are an active shareholder that supports good practices is obviously an advantage in fundraising. In terms of what LPs ask and what we ask as an LP, I clearly see a move to ensure GPs are implementing the policies they claim they are. Ardian has evolved from a position where we wanted to raise awareness among our GPs to a position where we are actively monitoring their progress.
As a GP, how do you measure ESG impact in terms of financial performance?
We started conducting individual ESG analysis in 2009 with five companies. Over time we have extended the ESG engagement programme. In 2015 we had 36 portfolio companies, and there will be more than 40 for the current exercise. We undertake a qualitative assessment of each company on a yearly basis. This allows us to identify material ESG topics and to define, alongside the management teams, the appropriate roadmap to improve the performance of each company on those topics. More recently we began some specific initiatives to translate ESG improvements in terms of EBITDA and cost savings.
Can you share an example?
At Novacap, a French chemical manufacturer that was in our portfolio from January 2011 to April 2016, a programme reduced work accident rates across company facilities by 75 percent during our ownership. Over the same period, the company’s headcount more than tripled, from 500 to 1,600. The reduction in working hours lost due to accidents represented a major improvement in employee working conditions and produced cost savings worth more than €500,000 per year.
When you implement ESG policies, do you see that most of the balance falls on value protection rather than value creation?
It really depends. At portfolio company Fives, an industrial engineering group, there is also a programme to develop eco-designed products and services. Thanks to that, in 2014 the company increased sales by €2 million and in 2015 sales increased by €48 million – so, a surge in sales. At the same time the programme allowed the company to reduce energy consumption among its customers in terms of CO2 emissions equivalent to 1.4 million tonnes. So this is clearly a case of value creation.
Ardian is one of the founders of the Initiative Carbone 2020 (IC20). What progress have you made at the portfolio company level to track and reduce carbon emissions?
We have two goals. The first is to extend measuring CO2 emissions throughout our portfolio and to cover all majority-owned companies by 2020, that’s roughly 50 companies. Of the 36 portfolio companies we reviewed last year, 24 have already measured their carbon footprint.
Our second objective: when we speak about CO2 footprints, very often we speak about only direct emissions. What is new with IC20 is the idea of measuring indirect emissions to obtain an extensive footprint.
Have you introduced new emissions practices?
We have also started putting in place programmes to reduce CO2 emissions at the portfolio company level. Novacap implemented a sustainability plan based on projects suggested by employees. It aimed at optimising production, reducing emissions by modernising production tools and reducing waste. The company reduced its CO2 emissions by 11 percent over two years. In financial terms this represented €2.4 million in avoided costs. Not all companies are at this level but it’s clear we already have examples where concrete actions were taken with tangible results.
Where does the balance lie between environmental, social and governance initiatives?
It depends on the portfolio company. We have to be very pragmatic. We can’t ask companies to implement dozens of initiatives a year. We have to make choices. So we really focus on material issues, usually three to five a year.
Given that Ardian invests across a range of asset classes, how do you go about implementing ESG criteria to assets such as secondaries or private debt?
The analytical framework is the same but as a secondaries and private debt investor, we act more like an influencer. We have huge levers but we apply them differently. For our fund of funds activity, which is mainly secondaries, our approach has been to foster dialogue with GPs and to use an annual monitoring questionnaire that we send to all our GPs. It covers the GP’s commitment to CSR and its integration into the investment process. Last year we sent this questionnaire to 160 GPs and 90 percent answered. It provides an extensive overview of ESG practices within our portfolio, and more than that, it allows us to see the evolution of practices on a GP by GP basis.
Do you exclude GPs that don’t meet your ESG criteria?
For our primary fund of funds activity, the ESG assessment of a GP accounts for 10 percent of its overall score. So it’s really integral to the assessment of the GP.
How big is your team?
There are two of us working full-time on ESG topics, but our model at Ardian has been to empower the investment team. This is key for us to be able to cover the full range of our investment activities. We are here to help them at any time to provide the appropriate analytical tools but it’s the investment teams’ responsibility to undertake ESG analysis for every opportunity they submit to the investment committee. It’s also their job to foster dialogue with the portfolio companies to make sure the engagement programme is not just one meeting a year. We also rely a lot on external experts to help us practically implement the ESG engagement programme. They go on site, visit portfolio companies, interview management teams, collect data, consolidate it and analyse it before we agree on the action plan with the management teams.
What’s the cost of not pursuing robust ESG criteria?
ESG is another lever to transform companies and build better, stronger ones over the long term. It protects value creation over the longer term. For the private equity industry as a whole, it is also an opportunity to demonstrate that we bring value not only to our LPs but benefits to the broader society. It’s about our licence to operate.
This article is sponsored by Ardian. It appeared in the Responsible Investment Special 2017 published with Private Equity International in February 2017.