Wednesday, 16 April 2008

Socially responsible private equity

Just stumbled across this report by the Environment Agency pension fund. This fund, as you might expect, is a bit of a leader in the socially responsible investment world. Almost uniquely as a UK fund they have attempted to apply a responsible investment strategy across all their asset classes - including the unions' favourite, private equity.

I've not read the report properly, so I am mainly posting for info in the hope that others maybe able to use it. However I did notice some interesting comments in the 'lessons learnt' section at the end. Notably the bigger PE funds (focused on buyouts) were less open to 'responsible entrepreneurship', as were those based in North America.

I'm just posting the section from the scheme's manager Robeco which handles the PE policy for them. The scheme itself has a separate list of points.


The key lessons learnt investing the Environment Agency mandate are as follows:

1) Most private equity funds find it easier to comply with negative screening (exclusion of certain industry sectors, such as tobacco and fur) than accepting the Responsible Entrepreneurship Strategy, which requires more efforts.

2) The acceptance of the Responsible Entrepreneurship Strategy is best in the Emerging Markets, followed by Western Europe and North America. The good reception in the Emerging Markets is caused by the fact that private equity funds in this region have experience dealing with sustainability-conscious investors, such as NGOs that have their own sustainability requirements. Especially in North America, hesitance with respect to the legal implications of accepting the Responsible Entrepreneurship Strategy is an important reason for not working with Robeco in this field.

3) The acceptance of the Responsible Entrepreneurship Strategy is better with smaller funds (growth capital funds, small buyout funds) than with larger funds (large buyout funds). Large funds apparently are less open to changing their current investment process than smaller funds that typically have a somewhat more flexible (less institutionalized) approach.

4) In order to convince private equity funds to accept the Responsible Entrepreneurship Strategy, a proactive approach needs to be taken, in which the value that this strategy can bring in terms of reducing risks and taking opportunities deriving from social and environmental trends needs to be explained on a very concrete and operational level.

5) The Responsible Entrepreneurship Strategy should be positioned as a practical tool to assist private equity funds in managing their portfolio companies better, rather than as a checklist that needs to be complied with and for this reason is merely an administrative burden.

6) The requirement to implement the Responsible Entrepreneurship Strategy somewhat limits the universe of investment opportunities. Whether this has a negative impact on returns in the end remains unproven.

7) The clean tech private equity market has over the past few years changed from a cottage industry to one of the next waves (after IT and Life Sciences) of venture capital investing. This is evidenced by the growth in the number and the quality of available private equity funds in this investment area.

8) It takes time to build a diversified clean tech private equity portfolio. That is, during the beginning of the mandate, clean tech private equity funds were nearly all North American based. Today, Western Europe and Asia are catching up. The consequence is that only a few years into the mandate the target geographical allocation will be reached.

9) On the co-investment side, the Environment Agency has a notice period of 10 working days to review an investment opportunity. Given the ambitious timelines of these deals, this can be challenging from a logistical point of view.

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