Briefing - BVCA admin

Research
Colin ellis, the BVCA’s Chief Economist, looks at the changing views of private equity to
responsible investing
With the scars from the financial crisis taking a long time to heal
in developed economies, the role that business plays in influencing
broader social developments, as opposed to just economic progress,
has remained firmly in the spotlight. But while the huge negative
banking externalities – most notably high unemployment and weak
wage growth for those still in work – are still at the forefront of many
people’s minds, the broader agenda of sustainability is an important
issue for all companies. This is particularly true in the case of private
equity, where a past lack of transparency and often large deal values
mean that the industry needs to tackle sustainability head-on.
Sustainability, in this context, implies businesses actively addressing
and managing environmental, social and governance (ESG) issues, in
particular to ensure that meeting present demands does not limit the
ability of others to meet their own needs in the future. Sustainable
growth and development must take into account long-term issues
and risks as well as short-term pressures. Businesses must address
potential negative environmental and social impacts, while at the
same time also meeting their shareholders’ requirements.
Private equity and venture capital should be uniquely well-placed
in managing these long-term issues. While public entities can be
distracted by frequent reporting requirements and short-term
share price movements, fund managers in our industry deliver their
best returns by genuinely maximising the enterprise value of their
investee companies. And that enterprise value, in turn, reflects not
just the profits or cost savings that company managers and General
Partners (GPs) can deliver this year, but expected profits over the
lifetime of the investee company: a share or equity stake in a firm is
a claim on all future profits as well as today’s bottom line.
The active management model of PE/VC lends itself very well
to this sort of long-term transformational approach, with funds
often investing substantial additional capital, over and above the
acquisition funding, in order to modernise, expand or improve an
investee company’s production process.
At the same time, this long-term focus means that the brands and
reputations of investee companies really matter. If a company’s
activities prove unpalatable to its current or potential customers –
for instance, a production plant pollutes the local environment or
working conditions in overseas factories are deemed unacceptable
– then its brand will be damaged, and future revenues and economic
value may be permanently lower as a result.
26 Autumn 2011 BVCA Briefing
Sustainability
matters
Surveying the land
All told, the theoretical structures suggest that sustainability should
be a key issue for GPs. But what happens in practice?
In order to gauge BVCA members’ attitudes to sustainability, the
BVCA Responsible Investment Advisory Board (RIAB) commissioned
a survey of members back in 2009, and the results were subsequently
published online. With two years having passed since that initial
exercise, the RIAB decided to conduct a similar survey in August
2011, to see if attitudes had changed.
The 2011 survey garnered a total of 80 responses from BVCA
members, broadly comparable with the previous 2009 exercise. And,
overall, the new results suggest that there is a growing awareness of the
role and importance of sustainability within the private equity (PE) and
venture capital (VC) community. As with the 2009 survey, a minority
of respondents did not think that sustainability (as defined above) was
appropriate for the PE/VC community. However, that minority shrank
from 39% in 2009 to just 24% in the most recent survey.
At the same time, the importance of sustainability for potential and
current investee companies is also more widely recognised. Sixty
four percent of respondents thought that active management of
sustainability issues made a company more attractive to investors,
compared with just 44% in 2009. Seventy seven percent of
respondents thought that actively managing sustainability issues
demonstrated that a company was adopting a long-term strategy,
compared with just 46% two years ago. And in terms of the cost
of sustainability, just 10% of respondents thought that companies
managing these issues were incurring unnecessary costs, down from
19% in the previous survey (Chart 1). The growing recognition of the
importance of sustainability was also evident in the extent to which
PE/VC firms consider ESG risks in managing investee companies,
and the general importance respondents place on those companies
acting in a sustainable manner.
investor interest
In part, the growing awareness of sustainability issues appears to
have been driven by investors as well as fund managers. Fifty-six
percent of respondents reported that their firm had been asked
to respond to investor questions that were focused specifically
on sustainability or ESG issues in the past two years. Where PE/
VC firms invest in emerging market economies, sustainability is