Feature article from our survey of the Private Equity industry

A geographic perspective: Contrasting approaches between US and European-headquartered Private Equity houses

One interesting theme to emerge from our survey is the difference in attitude and approach to RI between the US-headquartered PE houses and those in Europe.

US-headquartered PE houses are focusing squarely on the environmental pillar of the responsible investment agenda–in particular, eco-efficiency. Such initiatives deliver cost savings from using less energy and water, cutting waste and making production processes ‘leaner’. The efficiencies achieved are relatively easy to measure and can be expressed in cash terms.

Are large PE houses doing more on the responsible investment agenda?

From our own experience of the PE market, there does not seem to be a correlation between PE house size and commitment to a RI. Our survey backs this up – we found no clear dividing line between the two groups of PE houses. In fact, contrary to expectation, 50% of mid-tier participants are UN PRI signatories, compared to 36% of larger houses. Interestingly we also found little evidence that RI approaches are more developed in publicly owned PE houses. Indeed, a higher proportion of non-listed PE houses had RI policies compared to their listed peers.

These findings seem to imply that a key determinant of commitment to the RI agenda is the PE house strategy/ethos, rather than simply size of assets under management or type of ownership.
By contrast, European-headquartered PE houses appear to be addressing a broader range of issues, on the whole–not just the environmental aspects, but the social and governance ones too. Several houses described how they’re working with their portfolio companies to improve the way they manage ‘social’ issues like labour issues in supply chains, health and safety, and employee management. In these cases, the benefits are intangible (e.g. decreasing turnover and attrition, boosting morale to increase productivity and retention, attracting new customers, and enhancing reputation and brand).

Most of the US-headquartered PE houses said that social issues are ‘on their radar’ and conceded that they are yet to be tackled in earnest. A few mentioned this would be an important focus area for 2012. Likewise, governance is an area that came up much more frequently in our discussions with European-headquartered PE houses.

Many of these houses noted that the UK Bribery Act (which came into force in July 2011) has helped to deepen their understanding of the way their portfolio companies manage bribery, corruption and ethical risks. As a result of their recent efforts to comply with the Act, many houses are now armed with better quality management information on bribery/corruption. There’s more focused effort going into strengthening any weaknesses in this area. Anecdotal evidence suggests that the next step for some of these houses is to apply the same level of scrutiny to governance across all of the companies in their portfolio–especially in emerging markets.