Today's private equity industry is a very different beast to its 1980s counterpart.
Leading the charge in rehabilitating the industry's image is KKR the private equity raider that inspired Barbarians at the Gate, a chronicle of the wild 1988 takeover of America's RJR Nabisco.
Nearly a quarter of a century on, KKR has an altogether cuddlier image.
In 2009, it became one of the first private equity firms to sign the UN-backed Principles for Responsible Investment. The firm has also hired a dedicated team of people, including Elizabeth Seeger and Ali Hartman, in KKR's operational arm, KKR Capstone, that have subject matter expertise and are able to implement ESG programmes within KKR's private equity portfolio companies.
Its Green Portfolio Programme (GPP), an environmental efficiency strategy at 23 companies and KKR's flagship model in terms of ESG investment, has saved it hundreds of millions of dollars and significantly reduced C02, waste and water consumption.
But this is just one of many ESG initiatives the firm has implemented.
It's Responsible Sourcing Initiative (RSI), which targets companies setting up global supply chains, is another. This is focused on ensuring companies have the right processes and policies in place to improve the management of ethical and/or environmental issues in their low-cost country sourcing supply chains. As part of the RSI, KKR trained approximately 50% of its global portfolio company chief purchasing officers and general counsel on sourcing best practices in 2010.
"Private equity is the perfect vehicle through which to initiate a lot of the ESG elements that we utilise to build value within our portfolio companies," explains Seeger. "The private equity model, which is about long-term investments in a portfolio of companies, really allows us to align resources, infrastructure and guidance in a manner which is more difficult under other investment structure."
To Ken Mehlman, KKR Member and head of global public affairs, the firm's commitment to consider ESG issues as they pertain to private equity investments means more than just responsible investing; it means smart investing.
"We partner with our investors and portfolio companies to integrate ESG-related goals and initiatives into operations, focusing together on long-term results and value creation," he says. "To us, responsible investment is all about shared value value for our investors, our portfolio companies, and the communities where we all live and work."
Certainly, KKR, and others like them employing thousands of people across several global companies, have attracted increasing media and stakeholder scrutiny in recent years.
European corporate affairs director, Ludo Bammens says the firms now faces more pressure than ever before from investors, trade unions and other stakeholders to better integrate the consideration of ESG considerations into its investments decisions. These factors have motivated the firm's efforts, over the last five years, to align its work with the five Ps: principles, policies, processes, people and programmes.
All of KKR's private equity portfolio companies are in some way touched by its ESG efforts. For the most part, Seeger explains, everything the firm is doing within its various proactive programmes is above compliance. "Certainly, we work with our companies on regulatory issues but our programmes aim to go above and beyond what's expected in terms of local ESG compliance," she says.
At the KKR level, the consideration of ESG issues is well-integrated into the due diligence stage of investments. "At the earliest point possible, we consider whether a potential portfolio company has any material ESG issues we could help address," Seeger says. "As we're nearing investment in a company we will proactively think about whether it makes sense to consider that company for participation in one of our standing programmes, such as the GPP. At that point, some will then enter our formal programmes, while others may not."
Not a branding exercise
But, says Bammens, the firm's ESG efforts are, and always have been, an investment approach not a branding exercise. "Our key objective is to ensure we are as diligent and professional about the ESG aspects of an investment as we are about all other elements of an investment," he says. "Certainly, closer inspection of the ESG elements within a potential investment has helped to eliminate blind spots at the due diligence stage of the investment process."
The firm's efforts are paying off. "Today, investors tell us that they are supportive of our efforts and our leadership role within the industry," says Bammens.
KKR's work with the UK asset manager, Co-operative Asset Management, is a good example of this. They picked KKR to develop and build an ESG-specific co-investment vehicle. Just a few years ago that choice perhaps might have been less obvious.
"We see our ESG efforts as increasingly relevant," says Bammens. "And as the average holding length of a private equity investment is five to seven years, and the life of a fund is 10-years plus, I expect that trajectory to continue over the next decade."
Seeger considers every one of the initiatives launched under the firm's ESG umbrella to have their own story of success.
But the RSI, in particular, has highlighted a lot of best practices within its own portfolio, she says. "It has helped reinforce that there is a great deal of intelligence within our own companies, which can be easily translated to other investments."
In accordance with the PRI's principles of open architecture, the firm has gone to considerable effort to share as much as possible the knowledge and expertise it has built up in the ESG space with other private equity firms.
Together with investors, KKR has contributed to many industry guides for responsible investing. It has participated in many speaking engagements on the topic within the industry. KKR's partnership with the US Environmental Defense Fund (EDF), ongoing since 2008, has also been conducted as an open union whereby they can share what they have learned from partnering with us with others.
In 2010, KKR started engaging with several stakeholders to define Key Performance Indictors (KPIs) relevant to its business model and material issues. In its reporting documents, these are aligned with the PRI principles. The KPIs detail the ESG processes and integration issues we are working on improving and act as a benchmark upon which to evaluate our performance throughout each year.
KKR is one of if not the first to define ESG KPIs for fund managers, explains Seeger. "We hope these KPIs communicate clearly what we believe we need to do to ensure more sustainable investments and how those processes need to evolve over time."
Even so, Bammens believes, investors should ask more from any GPs they engage with. "The ESG focus should become a positive differentiator for GPs in their relationships with investors," he says.
But, Seeger warns, there will always be challenges to face with regards to ESG investment.
"One particular challenge we've worked very hard to solve over the years is how to scale ESG-related programmes up across a global portfolio, where we not only have a number of different industries and management teams, but we also have a wide variety of cultures and regulatory frameworks," she says.
For example, KKR has an increasing number of Asian companies participating in the GPP. South Korea's Oriental Brewery Group was the first Asian portfolio company to join. More recently, the Indian telco Bharti Infratel, and the Indian private cement company, Dalmia Cement, also joined the programme.
"In both those cases we realised that we needed to develop a team of people that were able to implement the GPP out of Asia as opposed to out of the US," she says. "We now have a global team comprising four in Asia, three in Europe and six in the US. They work to manage all of these programmes across jurisdictions, and utilise lessons learned in one region to inform investment in another."
To Bammens, it is very important to start your ESG assessment as soon the investment idea is circulated within the firm. "When such analysis begins early, you are better able to conduct top-line assessments and thereby pick up any potential ESG obstacles early in the investment cycle," he says. "It creates a fantastic learning platform."
"It enables you to really build on internal expertise because over time the same sectors, the same type of companies, and eventually the same issues come back and you therefore become more sophisticated in the way you look at these investments," he says.
So what's next? Certainly, all of the programmes in place now will continue in some way or another.
Indeed, says Mehlman, as KKR moves forward and continues to diversify its business outside of private equity and increase investments in new regions, it aims to remain thoughtful. And that applies both to the firm's approach to new ventures and in how it grows as an organisation, working to maintain the values and culture that have been the foundation of its work for more than 35 years.
Barbarians at the Gate this most certainly is not.
For more of IFLR's 30th anniversary coverage see http://www.iflr.com/30th-anniversary
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