Standing out, speaking up

Thomas DiNapoli, New York State’s comptroller and sole trustee of the state’s $140 billion pension system, recently congratulated the many private equity professionals working to enhance their environmental, social and governance (ESG) policies.

He was speaking at PEI’s annual Responsible Investment Forum, co-hosted by the UN Principles for Responsible Investment, where more than 350 fund managers and investors met to discuss best practices in ESG implementation.

DiNapoli has been an outspoken critic of companies whose ESG policies he believes aren’t adequate and, of course, the private equity industry itself in certain instances. DiNapoli first banned the use of placement agents in New York in April 2009 and launched a review of pension investments involved in the New York pension kick-back scandal, which eventually sent several New York politicians to prison. The comptroller proposed legislation in June to permanently ban the use of placement agents, paid intermediaries and registered lobbyists from doing business with New York State’s pension fund.

His words at the Responsible Investment Forum were welcome praise for an industry that continues to battle an image problem with regulators, politicians and the public.

Christopher
Witkowsky

As we note in this month’s Letter from Brussels, UK newspaper The Daily Mail recently kicked off a media storm accusing The Blackstone Group for allegedly financially engineering the destruction of UK convalescent home operator Southern Cross Healthcare Group, an asset it exited in 2006. The newspaper said politicians in the UK were facing calls to bar private equity firms from making investments in business that have an impact on the old and vulnerable.

The British Venture Capital Association was quick to point out that the report contained “significant inaccuracies”, and that Blackstone hadn’t owned Southern Cross for more than five years. It also noted that for more than a decade, “private equity funds have been significant and responsible investors in health and social care, providing not only necessary capital investment but also introducing modern working practices and efficiencies”. Blackstone, too, issued a detailed statement explaining why the allegations were false.

Speaking at the Responsible Investment Forum, BVCA head Mark Florman said misperception of the asset class – and in particular the relationship between GPs and LPs – was partially responsible for an uptick in regulatory scrutiny in Europe. Regulators in Europe, he said, believed LPs were being “exploited” by GPs and failed to realise that the LP/GP relationship was a “partnership that works”, that is “heavily negotiated”. Concern over how investors were treated has also been at the centre of increased Securities and Exchange Commission scrutiny.

While the industry’s various trade associations have been working to educate the public and politicians on how the asset class works and who it benefits, public pensions and other investors also need to stand up for their fund managers. Far from being the unwitting victims of nefarious financial wizards, panellists and delegates noted LPs were active partners in funds with strong governance measures – and increasingly, those funds feature robust environmental and socially responsible investing practices, too.

Instead of simply pushing their managers to increase focus on ESG issues, LPs should also be telling the market how hard GPs are working to “do the right thing”, as keynote speaker George Roberts, co-founder of Kohlberg Kravis Roberts, characterised his firm’s take on responsible investing.

KKR has done a good job of publicly explaining how it has focused on issues like reducing greenhouse gas emissions and waste at 16 of its portfolio companies. But the same messages being trumpeted by LPs like public pension funds – which depend on the asset class to provide the returns that will provide pensions for firefighters, teachers and others – would be even better received by a public sceptical that private equity firms do little more than strip and flip assets.

Investors should not hesitate to tout the positive changes private equity firms have made at numerous companies, for it also benefits LPs if their constituencies see they are investing with managers working hard to make profits in responsible ways.

DiNapoli, and many other LPs present at the conference this week, clearly believes this. Let’s hope we hear more of them talking about it publicly more often.