Private Equity Wants You to Feel Good About Investing
More and more private equity firms have been working to prove a thesis that you can do well by doing good
(Bloomberg) -- At less than 3 inches long from head to tail, the dunes sagebrush lizard is in the running for meekest creature on earth. The tiny reptile lives on land in West Texas where Vista Proppants & Logistics Ltd. was looking to build a sand mine. Vista is owned by a private equity firm, First Reserve Corp., based in Greenwich, Conn., and a casual observer of last year’s stare-down between the masters of the universe and the lowly lizard might have figured the next step would be bulldozers. The sand was of the highest quality, and the lizard, even though it’s been found in only 11 counties in Texas and New Mexico, was prolific enough to stay off any endangered or threatened lists. What Vista did next may be surprising. The miners worked with local conservationists to make sure as few lizards as possible were harmed in the digging of their sand pit.
Altruism? Maybe not. If Vista and First Reserve had come heavy, they’d doubtlessly have had to deal with lawsuits, habitat mitigation, and media reports portraying them as villains. By engaging with conservationists, Vista mitigated risk. And by mitigating risk, Vista was making a smart business decision.
More and more private equity firms have been working to prove a thesis that you can do well by doing good. Blackstone Group LP has a team headed by its chief sustainability officer, Don Anderson, that works with portfolio companies such as Equity Office Properties Trust and Hilton Worldwide Holdings Inc. to turn off lights in empty hallways, control room temperatures, and reduce water use. The idea is to save money by saving natural resources. KKR & Co. works with nonprofits including the Environmental Defense Fund to improve environmental, social, and governance-related practices at portfolio companies, focusing on operational changes. London-based Cinven Ltd. requires companies it controls to report quarterly on metrics such as employees’ work-related illnesses, inclusion, and diversity.
Other firms have funds dedicated to backing companies with an explicit social or environmental mission. TPG’s Rise Fund, for example, has invested in an app that encourages people to accumulate their savings by investing their spare change. Through its Double Impact Fund, Bain Capital LP backed a landscaping-materials recycler and a fitness company operating in underserved communities. Both investment vehicles target the same financial returns as those set for the firms’ traditional buyout strategies.
Lawrence Heim, a managing director at consulting firm Elm Sustainability Partners LLC, says the business world is in the midst of recalibrating the value of sustainability. “We’re on the very front end of seeing what kinds of new ways there can be to monetize sustainability in a truly meaningful way,” he says.
Arguably, private equity firms are uniquely positioned to care about long-term outcomes. While public companies can and do invest in initiatives that may take years to come to fruition, their performance is tied to quarterly earnings. Managements buy back shares and increase dividends to support their financial forecasts, and in cases of stock-based compensation, add to their own paychecks. Buyout firms, even those that are public, answer first to the pension funds, endowments, and other investors who agree to give them large sums of money for years. They often buy controlling stakes in companies, with a board seat included, giving them influence to make changes.
What’s more, their investment timelines are often much longer than those of other investors. Traditional private equity funds operate on a decade-long fund cycle—and many are launching even longer-dated pools—giving them the time and space to prioritize long-term profits. For example, it may take three years for energy bill savings to be realized from retrofit projects. That’s an easier sell when you track returns over five and a half years, a buyout firm’s average holding period, according to Preqin Ltd., rather than a quarterly reporting period.
Not everyone thinks profit will automatically follow when social or environmental factors prevail. The thinking behind President Trump’s policies assumes the Paris climate accord cost American jobs; the Clean Power Plan unfairly picked corporate winners and losers; legal liability for polluting waterways obstructed honest moneymaking; and federal protection of tracts of pristine wilderness, such as the Bears Ears and Grand Staircase-Escalante national monuments in Utah, thwarted lucrative mining and drilling and starved local communities of economic development and jobs.
Many investors are turning toward something more nuanced. Sure, it’s cheaper to spew carbon dioxide into the sky. Of course, dumping waste chemicals into nearby waterways lowers disposal expenses. No doubt it would be easier for executives to eschew safety outlays that prevent mishaps but eat into profits. All these propositions are true, but only in the short term. In the long run the costs will be real—and high. And they’ll be borne not only by companies, but also shared with the wider world. “Part of our role is to have a social license to operate and publicly take a stance on what’s right,” says Kim Thomassin, executive vice president at Canadian pension manager Caisse de dépôt et placement du Québec. “The voice of institutional investors is extremely important. We’ll never get rid of saying money talks.”
That’s sort of what happened when Trump relaxed the protection of federal land. When his administration opened Bears Ears to extraction companies in February, there were no bidders.
To critics, the Trump philosophy harkens back to a business community unencumbered by social responsibility. One has to return to America’s Gilded Age, in the late 19th and early 20th centuries, to find any reality that approaches that fever dream. Later, the business boom after World War II was marked by a morning sickness drug that caused heartbreaking birth defects, the endangerment of the iconic bald eagle, acid rain that reduced Eastern hardwood forests to denuded sticks, and mining accidents that did irreparable harm to a generation of workers. It wasn’t until the creation of the U.S. Environmental Protection Agency in 1970, on President Richard Nixon’s watch, that possible prosecution and associated costs were taken seriously and companies factored in extended public shaming as a possible expense.
Threats to the planet now are plain to see. Climate change has melted enough Arctic ice to submerge whole islands. Water pollution has rendered the entire length of rivers uninhabitable. Coal miners are being devastated by a resurgence of black lung.
As consciousness about the environment, worker safety, and diversity has become more prevalent, at least in most business circles, so has the realization that danger lurks when those considerations are ignored. To wit: 3M Co., the manufacturer of Post-it notes, in February agreed to pay $850 million to settle eight years of litigation over dumping chemicals that got into waterways. In a statement at the time, John Banovetz, 3M’s chief technology officer, said that while the company doesn’t believe there’s a “public health issue” related to the chemicals, the settlement reflects its “commitment to acting with integrity and conducting business in a sustainable way.”
“Issues that used to be political and not economic have married,” says Henry Cornell, founder of Cornell Capital LLC and a former executive at Goldman Sachs Group Inc. “Environmental consciousness is imbued in intelligent private equity investing.”
Indeed, environmental and social issues are becoming so ingrained in corporate governance that private equity firms have found a way to measure sustainability goals in the language of profit and loss.
Blackstone has reported savings of more than 15 percent in energy costs from efficiency programs at resorts and hotels in its portfolio. TPG Rise has developed a metric known as the impact multiple of money, which tracks the lift to household income at an Indian dairy business, for example, or the measurable savings related to health-care and legal costs through portfolio company EverFi Inc., which delivers digital courses to educate students and employees on topics such as sexual assault prevention.
Private equity firms know their audience, and they’ve devised ways to show that the bottom line doesn’t have to suffer—and can even improve—when societal considerations are factored in. Sustainability has earned a voice in investment committee meetings.
But let’s not forget that private equity firms are for-profit businesses. Saving energy bills or wildlife has financial benefits, but those measures are often too marginal to be the deciding factor on whether to do a deal in the first place. The reason Vista developed that mine was to sell the sand to frackers, who use it to blast oil and gas from deep shale rock. Yes, today’s world runs on the fossil fuels that scores of oil, gas, and coal funds help extract. Fossil fuels largely remain a profitable enterprise, but carbon-emitting activities are slowly degrading the planet.
Private equity dealmakers are responsible for generating high financial returns for their limited partners, and funds dedicated to generating social or environmental returns haven’t uniformly outperformed more traditional pools. From that perspective, it’s not surprising that most private equity firms haven’t gone all-in on sustainability. The danger is they’re not factoring in the societal costs they don’t currently have to shoulder. In the long run they, and indeed society, may pay a price.
Mittelman is a private equity reporter at Bloomberg News in Boston.
To contact the editors responsible for this story: Bob Ivry at bivry@bloomberg.net, Siobhan Wagner Stryker McGuire
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