Private equity embraces ESG – who knew?

July 23, 2021 • 4 minute read

It’s open season on private equity.

For months now the Daily Mail has waged a vigorous campaign against what it calls the ‘vultures’ and ‘untrammelled asset strippers’ who are buying up British business ‘on the cheap’ in a ‘pandemic plundering spree’.

In the first half of 2021 private equity firms struck deals worth more than $500bn – the highest since records began, pushing global mergers and acquisitions activity to an all-time high.

In the UK many of the targeted companies – notably Morrisons , Britain’s fourth largest supermarket chain – are listed on the stock market, where valuations languish those of international peers, making them more vulnerable to takeover.

The Mail campaign to stop these takeovers has won some cross-party political support.

This week the Financial Times, a seemingly unlikely ally, also waded in. In an article headlined ‘The private equity backlash against ESG’  deputy editor Patrick Jenkins queried whether the recent buy-out surge was also “a rebellion against some of the progressive constraints of public company existence, particularly the growing demands of complying with standards on environmental, social and governance (ESG)?”

The evidence, he argued, was “mounting” that the advantage of private company status has increased as public company governance rules became stricter. ESG, he concluded, was a “fringe topic” in the private equity industry.

This promoted a furious backlash from FT readers in the comments section (which is always worth reading).

“ESG features as a prominent topic in all our DD (due diligence) efforts,” said one PE investor. “Why? Because if we want to take our portfolio company public in 5+ years or trying to exit via a sale, we need to be sure we aren’t going to have a stranded asset on our hands…because other investors are unwilling to pay for  a company that’s bottom of the pack.”

Others pointed out that private equity firms are institutional investors like pension funds, who are driving the ESG and diversity agenda. Put simply, those who pay the PE piper call the ESG tune.

It was as if the private equity sector, whose response to the Mail campaign so far has at best been muted, had finally mobilised and found its collective voice.

All of which begs the question why private equity and venture capital’s key messages –  creating public value, employing almost a million people in mostly growing and successful small and medium sized businesses, allocating capital more efficiently, filling funding gaps gaps etc –  struggle to cut through to mainstream media?

Well, the name doesn’t help for a start. ‘Private’ equity implies secrecy, or at least lack of transparency. In these times of inclusive stakeholder capitalism, that’s not a good look.

There is also the impression that private equity spends too much time talking to itself and, at most, a small coterie of policymakers who decide the rules around thorny but important issues like carried interest (or performance fees)  and tax breaks on interest payments.

The media also has an obsessive focus on the top-end of the PE industry, where financial engineering and arbitrage are prevalent.

But not all private equity companies are the same.  They come in all shapes and sizes. They shouldn’t be tarred with the same brush.

At the low- and mid-market level, for example, private equity is a very efficient way of transitioning owner-managed business to a more enduring and committed business model.

Of course, PE is not immune from executive excess or corporate collapse – but the same can be said for any and every form of corporate ownership structure.

Yes, PE is a high cost business model. It still has a way to go in terms of diversity – it remains dominated by white, middle-aged men. And it is still very much the case that private equity firms vary in their views on and engagement with ESG, even as the limited partners – the institutional investors and wealthy families who fund PE houses – exert more pressure to act.

Yet for all its shortcomings, private equity is more often than not a force for positive change.

It’s just that you’d never guess from recent media coverage.

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