Jeff Tannenbaum Bets on Kinder Capitalism, Even for LBOs

(Bloomberg) -- Embedding social responsibility into a company’s organizing documents has sometimes been seen as risky, but private equity pioneer and hedge fund founder Jeff Tannenbaum is betting it is the future.

Tannenbaum’s firm, Titan Grove Holdings, which focuses on sustainable companies, said Tuesday that it sold smart city telecommunications company Modus to Denver-based private equity firm Bow River Holdings.

While terms of the deal weren’t disclosed, Bow River plans to retain Modus’s B Corp designation as part of the acquisition -- a sign that public benefit corporations can keep that organizing structure as they grow.

B Corps allow companies to legally pursue social outcomes at the expense of profit -- essentially the embodiment of stakeholder capitalism in Delaware law. A company that organizes as a B Corp can be sued by shareholders if it doesn’t uphold the interests of broad stakeholders, but shareholders can’t sue if a company chooses a social or environmental goal that comes at the expense of profits. To get certified as a B Corp, companies are audited regularly to show that they are considering social and environmental outcomes.

For the 57-year-old Tannenbaum, who worked with KKR & Co.’s Jerry Kohlberg as the private equity industry was starting and then pioneered the hybrid hedge fund-private equity firm model at Fir Tree Inc., B Corps represent the next big thing.

“I think the B Corp movement is the right path forward for capitalism,” Tannenbaum said in an interview. The companies “tend to be better run, attract better employees and, in our case, have margins that are higher than their competitors,” he said.

Tannenbaum said public investors are broadly unfamiliar with what the designation even means. When they are considering B Corps, they often think of Unilever NV’s Ben & Jerry’s and Seventh Generation units, and Etsy, which was a B Corp when it went public before dropping the designation.

Now there are some proof points that show benefit corporations are becoming a proper asset class, Tannenbaum said. Lemonade Inc., the socially-conscious online home insurance provider, soared about 86% in its market debut, while retaining its B Corp status. Global food conglomerate Danone SA has been turning itself into the world’s biggest B Corp one country at a time.

Today, there are more than 3,500 B Corps globally, including 14 that are publicly traded, according to B Lab, which certifies the companies’ status.

“To me, it’s not unlike where ESG investing was five years ago,” Tannenbaum said. As bigger amounts of capital are controlled by investors that have social or sustainability mandates, B Corps are likely to become even more attractive, he said.

“I could see half of private equity and venture capital-backed businesses over the next five years be B Corps,” Tannenbaum said. “B Corps are quickly becoming the place where the next generation of workers wants to work.”

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