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
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
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
But this is just one of many ESG initiatives the firm has
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
Certainly, KKR, and others like them employing thousands
of people across several global companies, have attracted
increasing media and stakeholder scrutiny in recent
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
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
"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
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
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
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
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
"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
For more of IFLR's 30th anniversary coverage
How to revive UK private equity
Why impact investing is the next corporate innovator
KKR's guide to responsible investment