INSIGHT - Responsible Investor · The growth of social venture capital is another area where...

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2015

PRIVATE EQUITY

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APRIL 2015www.responsible-investor.com

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APRIL 2015

Contents Page

USS: An LP perspective on Private Equity and Responsible Investing: Why Private Equity makes sense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Kris Douma: PE challenges: how to be ‘in control’ of ESG-risks and opportunities . . . . 4

EQT Partners: Driving sustainability with private equity . . . . . . . . . . . . . . . . . . . . . . . 6

Partners Group: Responsible investment in private equity: A clear opportunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

BVCA: ESG integration into PE practice: The UK perspective . . . . . . . . . . . . . . . . . . . . 13

RI Interview: Erika van der Merwe, Southern African Venture Capital and Private Equity Association (SAVCA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

“ESG has become one of the most powerful tools in the world forchange alongside legislation and social media.”

Not our words, but those of Jeremy Coller, Founder & CEO of Coller Capital,the secondaries buy-out firm and one of the biggest names in private equityglobally.

In a recent interview with Responsible Investor, Coller acknowledges that heis making a ‘big’ statement. But it’s a sign that major private equity housessee a long-term sea change in how investment can be an important social

benefit outside of pure economic growth.

And there’s no doubt that Limited Partners (LPs) demands to the General Partners (GPs) to integrateESG factors into portfolio analysis and decision-making has changed the way GPs are having to thinkabout their portfolio companies, and reporting on their activities.

As Kris Douma, former Director Responsible Investment & Governance at MN, the Dutch pensionfund conglomerate, writes in this inaugural RI INSIGHT focus on private equity (see pages 4-5):“Private equity funds that are planning to do their first fundraising since approximately 2010 will findthat the landscape of European institutional investors has considerably changed,”

There’s plenty of evidence to back him up.

In RI’s Asset Owner Benchmarking survey (to be published April 2015), 66% of the LP respondentssay they will undertake a private equity request for proposal/manager search in the next two yearswith 79% regarding ESG as a differentiator when hiring private equity managers.

And those same LPs already want to talk in some depth to their managers about strategicsustainability risks and return drivers within their portfolio holdings: 59% expect to spend timeengaging on ESG with their existing PE managers. That means the pressure is on regardless ofwhether PE managers are raising ne w money or managing and reporting on invested funds.

A skill of the private equity industry, however, is to absorb client demand and quickly learn how itcould be a business driver and differentiator. It has done just this.

Recent research of 42 PE firms across a broad range of geographies and industries representing $640billion AUM by Professor Francesca Cornelli and Dr Ioannis Ioannou of the London Business School,looks at how ESG is moving away from compliance towards private equity business strategy.http://www.collerinstitute.com/content/userdocuments/newsdocuments/25.pdf.

The growth of social venture capital is another area where private investing is making a difference byapplying sound business rationale to good, sustainable and profitable companies.

This RI Insight report on private equity takes a closer look at some of these major developments in thefast-moving private equity arena.

Hugh Wheelan, Managing Editor, Responsible Investor

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There has undoubtedly been increased interestfrom asset owners in investing in PrivateEquity over recent years. Underpinning its

investment strategy, USS has a commitment tolong term investing which the fund believes alignsclosely with private equity as an asset class:investments in PE funds tend to be for 10 years at

a minimum, and the holdingperiods for companies held withinPE funds tend to be longer thanpublic markets.

As a result, USS has been an activeinvestor in PE for almost a decade. Thefund took the decision to invest in PE in2006 and built an in house team toboth select and provide oversight of PEfunds. The Private Markets team, whichinvests in PE, Infrastructure, PrivateCredit and Real Estate now consists of

24 professionals, has invested $6 billion with over 30 PEmanagers, and in over 20 co-investments. The PEportfolio represents approximately 8% of USS’s totalassets of £45 billion.

Investments in PE are usually structured as LimitedPartnerships where pension funds (or Limited Partner -LP) invest via a PE fund manager (the General Partner -GP). With this structure, it is essential that LPs haveappropriate processes in place to ensure that detaileddue diligence is undertaken of the GP prior to anyinvestment decision, and that monitoring processes areput in place to track performance and activity postinvestment.

Why invest in PEThere are a number of reasons why investing in PE has arole to play as part of a diversified asset owner portfolio:

• Returns: According to the Ernst and Young1, between2005 and 2013, data for the sector show that PE hasconsistently outperformed public market equivalent.

• The long term nature of investments in PE is alsoenables funds to ride through economic cycles, asthere is a relative de-correlation from short-termcycles. This provides funds with diversification. USShopes to gain returns from the illiquidity premiumassociated with PE.

“The Private Marketsteam . . . consists of24 professionals, hasinvested $6 billionwith over 30 PEmanagers, and in over20 co-investments ”

An LP perspective on PrivateEquity and ResponsibleInvesting:

Why Private Equity makes sense David Russell

Co-Head of Responsible InvestmentUSS

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• Governance: the governance of PE portfoliocompanies is much more tightly held than themassively distributed public equity market. As a result,PE funds have closer links to portfolio companymanagement than public equity managers, and are ina position to make changes to improve performance.

• PE enables pension funds to make direct investmentin the real economy – accessing positions incompanies with higher stakes than is usually possiblein public markets. In addition to the financial aspects,PE is frequently directly involved in the developmentof the real economy, job creation and innovation. Tocomplement their investments via GPs, asset ownerslike USS also pursue active co-investment strategies,leveraging off of the funds in which they invest.

What are the issues?Private Equity is an asset class that some love to hate:whenever a PE-backed venture fails, the press have a field

day, focussing on the negatives, with anarrative of “vultures” destroying jobs.But it is often more complicated thatthe press would have us believe. PEportfolio companies do sometimes fail,as do other companies, both public andprivate. Many PE portfolio companiesare already in a distressed state whenthey are bought by PE firms, it’s nosurprise that sometimes turnarounds donot work. This is not to say that PE isperfect, like many private or publiccompanies, there is often a risk that

they can act in ways that can be socially, environmentallyor even economically unacceptable.

Some of the positives above are also negatives: forexample, illiquidity is a real issue for many asset owners,where tying up capital for ten years would be difficult.

In addition, the fees associated with the asset class areconsidered by many to be too high, with the classic “2 and20” model being seen to enrich the GP and their managersat a cost to LPs. This is one of the reasons USS has built itsown team as it enables the fund to invest directly in goodGPs (rather than via Fund of funds which add an additionallayer of cost) and negotiate firmly on fees.

Finally, there is also a risk to capital if an investmentor a portfolio company fails.

Relationships with GPsOnce a manager is selected, it is important that assetowners don’t “invest and forget”. Whilst maintainingrelationships with Private Equity funds does take resource,oversight of the GP is critical to ensure that the fund isactually investing in the way and the types of assets it saidit would during its fundraising. Maintaining an ongoingand strong relationship with the GP enables this oversightto be effective. Given the scale of its investments, USS willusually take a position on a funds’ Advisory Board,helping cement the relationship with the GP.

How does RI fit into this?At USS, RI policies and strategies apply to all asset classes,and therefore PE is no exception. The fund has, since theearly days of its allocation to PE, undertaken RI focusseddue diligence on potential PE GPs prior to investment.This RI due diligence is hard wired into the overallinternally undertaken PE due diligence process: USS can’tinvest in a PE fund without sign off from the RI team.Given the nature of PE investing via GPs, where assetowners invest in a strategy rather than assets (as these willbe bought with the invested monies), the focus of duediligence is on the processes in place at a prospective GP,and how they approached ESG integration in previousfunds.

The sector has responded well to increased pressurefrom a range of asset owners to up its game on ESGissues. From a start where many funds had no idea whatRI or ESG was, we are now at the pointwhere many funds include ESGinformation in their documentation whenthey are fund raising. The PE membershipof the UN supported PRI is significantlyhigher than would be expected for analternative asset class. We are also seeingincreased public transparency on ESGissue amongst the leading funds –something unimaginable just a few yearsago for a sector where the “Private” in PE meant “secret”!

With appropriate due diligence and oversight by assetowners, the sector can and has been encouraged tointegrated ESG issues into investment process’s, and tocommunicate better the actions undertaken. So whilst PEfirms sometimes get a negative press, it is an asset classwhich often fits well with the needs of asset owners aslong term and responsible investors.

“we are now at thepoint where manyfunds include ESGinformation in theirdocumentation ”

“Many PE portfoliocompanies are alreadyin a distressed statewhen they are boughtby PE firms, it’s nosurprise that sometimesturnarounds do notwork ”

1. Taking stock: How do private equity investors create value? E+Y, 2014

David Russell co-heads the Responsible Investment Team of USS Investment Management, the fund manager forUniversities Superannuation Scheme, where he has worked since 2001. USS is one of the largest pension funds in the UnitedKingdom, with assets in excess of £45 billion and over 330,000 members. USS has a Responsible Investment (RI) team of sixand a RI strategy which focuses on integrating extra financial factors into its investment processes across asset classes, andon engaging with public equities and other assets where these issues pose a risk to the fund’s investments.

David is a Board member of the PRI Association and is an advisor to the Board of the Institutional Investors Group on ClimateChange (IIGCC). He is also on the Board of the International Centre for Pensions Management. David has previously workedas an Environmental Manager for a UK retail company, and was for five years a University lecturer in EnvironmentalManagement. He has a Masters Degree in Environmental Impact Assessment.

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PE challenges: how to be ‘incontrol’ ofESG-risks andopportunities

Private equity funds that are planning to dotheir first fund raising since approximately2010 will find that the landscape of

European institutional investors has considerablychanged. Without a credible policy and trackrecord of responsible investment and integrationof environmental, social and governance (ESG-)issues in pre investment due diligence, astructured approach to monitoring and managingportfolio companies, backed by relevant expertiseand adequate ESG reporting, that PE fund will findmost doors (or wallets) closed. Why and how didthis change from ‘nice to have’ RI-policies to ‘must

have’ solid RI-practices comeabout and what next requirementscan PE funds expect theirEuropean institutional investors todemand? The simple answer is,institutional investors have to be‘in control’ and will only invest ifthe PE fund provides sufficientguarantees to that end.

At the start of the ‘movement’ ofresponsible investment PE funds could

get away with a rather general statement of their RI-policy or even with a promise that they would developsuch a policy and make some reference to that in anobscure part of a side letter. Besides a critical publicopinion and the general need to be more ‘in control’ theexperience of many limited partners (LPs) has shown thatESG-related issues do indeed have a reputational andmaterial impact. A critical public opinion and skepticismat pension fund boards about the added value ofrelatively illiquid and expensive PE-investments have ledto a situation where ‘no mistakes are allowed’. They

don’t want unpleasant surprises in the media and theneglect of material ESG-issues that ultimately affectfinancial performance of the fund negatively are nolonger tolerated.

Without mentioning names, let me give you anumber of (near) misses that worried some of thepension funds I have worked with. First there was a PEfund with an Austrian portfolio company in the metalindustry that thought it could restructure the companywithout proper negotiations with the unions. In Austriathat is almost a criminal offence and shows a grossneglect of local industrial relations. After I contacted thefund they changed their attitude and a strike could beprevented. Second example is a fund that invested in aoil storage company that turned out not to have itsenvironmental management in order. Environmentalauthorities had to close the facility, additionalinvestments had to be made and the major client did notwant to wait and left, causing the company to lose 30%of its turnover. Third example is the exit of a portfoliocompany in the mining industry through a partial IPO(approximately 25%). A couple of months later it becamepublic that the company was accused of bribery in

“ institutional investorshave to be ‘in control’and will only invest ifthe PE fund providessufficient guaranteesto that end ”

Kris DoumaIndependent RI-consultant

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western Africa under the FCPA and the shares lost 30%of their value, with 75% of the shares still owned by thefund. And if these issues were not bad enough, the worstis that LPs were not properly, timely informed and had tofind out from other sources.

Let me also mention a near miss. A US-based PE firmplanned to invest in a company in the meat industry in

southern US but shortly before closingthe deal found out that one third ofthe employees were illegal immigrants.They called (some of) their LPs to ask ifthey could still invest? My answer wasthat I was glad they found out just intime and that they could still invest ifthey thought they could solve the issue

of the illegal immigrants and still make the companyprofitable. The basics are, as always, that ‘an unidentifiedrisk is a threat, an identified risk is a management issue’.A more difficult example was when we were asked if a PEfund could invest in a company providing armed securityto protect merchant navy ships along the coast of Africa.I admit I struggled with that one, but one other LPapparently already gave a ‘no’ before I could discuss thismore ethical issue with relevant clients, including theDutch pension fund of the merchant navy. And then Ihaven’t even mentioned the opportunities that resourceefficiency, good employee relations and other ESG bestpractices can offer for making profitable businesses.Because fortunately some PE firms have started programsfor energy saving, resource efficiency and have broughtbest practices from one portfolio company to othercompanies, benefiting of abundant low hanging fruit.

The examples show that a credible RI/ESG-practice isnot something exotic, but should be key for any PE firmthat claims it will create a good long term financial

performance by making bettercompanies. What is needed is not justa paper policy, but a tone at the topthat makes clear that RI and ESG-integration are a key to success, astructured approach in the differentstages of pre investment due diligence,the 100 day plans, monitoring andmanaging portfolio companies andmaking sure that the company’s ESG-risks and opportunities are adequatelymanaged at the time of exit. If a good

ESG-record of a company may appear not be relevant fora company now, it definitely will at the time of exit,approximately seven years from now. That RI/ESGapproach needs to be backed by in house and if

necessary external expertise that goes beyond ‘mere’compliance. Of course this has to be accompanied bysufficient ESG-reporting for which excellent ESGreporting frameworks have already been developed byPRI and a coalition of LPs and PE industry associations.

So far for the ‘must haves’ for fund raising in 2014,but 2015 will see new demands. Because for LPs to be incontrol it does not suffice to ‘trust’ that the GP will makesure that there will be no unpleasant surprises. The PEindustry is generally acclaimed for having a goodcorporate governance model. But that refers only to therelation between GP and portfolio company, not to theLP-GP relation. Because that is one of the worstgovernance models in the entire financial industry. Takinginto account the legal characteristics of a limitedpartnership, LPs have to seek improvement of thegovernance models to make sure they are ‘in control’ oftheir investments. If there are potentialethical concerns about investments inportfolio companies, LPs have to be in aposition to exert their influence. But moreimportant LPs should be granted theauthority to adopt the annual accounts ofthe fund, appoint the independentauditor of the fund and be involved inthe appointment of additional or new‘key persons’. A more formal structurethan the current advisory board model isneeded to allow LPs to monitor andcontrol if the GP acts in accordance withthe letter and spirit of the Limited PartnerAgreement and potential side letters.

For PE firms that in the near futurewill do their first fund raising in years,there are important lessons to be learned. But even thosePE firms which have already become accustomed withcurrent LP-demands, will find that the bar keeps rising.Major European institutional investors, but also agrowing number of North American and Asian investors,will require more credible and robust RI policies,structural ESG-practices, backed by concrete examples ofactual cases, better alignment in fees structures,remuneration and better fund governance. If PE firms arenot prepared or able to facilitate LPs in their demands tobe ‘in control’ of their PE-investments, public opinionand pension fund boards will eventually turn their backupon them. But I am sure many PE firms will not takethat risk, after all: ‘an unidentified risk is a threat, anidentified risk is a management issue’. To all fundraisingPE firms: a warm welcome to the world of bettergovernance, ESG-integration and responsible investment.

“an unidentified risk isa threat, an identifiedrisk is a managementissue ”

“What is needed isnot just a paperpolicy, but a tone atthe top that makesclear that RI andESG-integration area key to success ”

“LPs should begranted the authorityto adopt the annualaccounts of the fund,appoint theindependent auditorof the fund and beinvolved in theappointment ofadditional or new‘key persons’ ”

Kris Douma worked with the Dutch trade union FNV for 12 years. From 2003 till 2007 he was an MP in the House ofRepresentatives in the Netherlands for the social democratic party. Following that he was (2007-2014) Director ResponsibleInvestment & Governance and member of the fiduciary management team at MN (formerly Mn Services), the asset managerfor 15 Dutch and UK pension funds with €100 billion AUM. From 2010 to 2014 he was also chair of the investmentcommittee and board member of Eumedion, the Dutch Investor platform. Currently he is (parttime) interim programmanager 'In the Public Interest' at the Dutch Professional Accountants Organisation, coordinating the implementation of aset of more than 50 measures to improve independence, integrity and quality in the Dutch audit industry. He recently startedas independent consultant on CSR, RI and ESG risk management for asset managers and private equity.

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Driving sustainabilitywith private equity

Private equity is one of the most effective andpowerful corporate governance models today.EQT strives to use that power to drive

sustainable development and growth. By makingportfolio companies stronger for the long-term, EQT

can create returns for investors andadd value to society.

The private equity industry hasgrown with tremendous speed overrecent decades, not least in Europe. Inthe past five years or so, responsibleinvestment (“RI”) has climbed to the topof the agenda at most private equityfirms, including EQT. It spans a numberof different areas from environmental,social and governance (“ESG”) issuessuch as climate change, stakeholder

relations, business ethics and corporate citizenship, butwith one common denominator, namely sustainability.

“We like to look at sustainability in two ways. One isthat each portfolio company, potential or current, should

be, or strive to be, sustainable in its own right. The other islooking at companies that through the nature of theirbusiness either helps to counter-act changes like climatechange or helps to mitigate the effectsthat we know a rising global temperaturewill have,” says Thomas von Koch,Managing Partner at EQT Partners and one of the firm's founders.

Consideration and genuinemanagement of ESG factors have been anintegral part of EQT’s investment processand ownership model since the firm’sinception in 1994 and EQT aspires to usecurrent best practice to promote andadvance sustainable investment andbusiness practices. Over time, thisproduces healthier, stronger and future-proof portfoliocompanies, contributing to value creation while alsoreducing the risk in the portfolio.

In 2010 EQT formalized what was already a part ofthe business model in a policy that covers RI practices. It

“ In the past five years or so, responsibleinvestment (“RI”) hasclimbed to the top ofthe agenda at mostprivate equity firms,including EQT ”

“Consideration andgenuine managementof ESG factors havebeen an integral part ofEQT’s investmentprocess and ownershipmodel since the firm’sinception in 1994 ”

Thomas von Koch Managing PartnerEQT Partners

Therése Lennehag Head of Responsible Investment EQT Partners

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describes what is expected of EQT as an investor andowner as well as what EQT expects from its portfoliocompanies. The EQT RI Policy considers factors such as the

environment, labor and human rightsand ethics when a potential investmentis assessed. Once an investment hasbeen made, EQT raises awareness,promotes high standards and monitorsobservance of RI factors.

“EQT is also a signatory to the PRIand the process of deepening andwidening EQT’s integration andengagement in this area is an on-goingeffort. Currently, we are looking atmore innovative and inspiring ways of

following up, measuring and setting targets for bothportfolio companies and EQT as a whole. Already today,ESG considerations are a natural part of all portfoliocompany governance and the investment process,” saysTherése Lennehag, Head of Responsible Investment atEQT Partners.

RI factors that are highlighted in the EQT RI Policy arelimitations and reductions of the emission of harmfulsubstances and waste, limiting and reducing consumptionof scarce resources, zero-tolerance regarding child labor,discrimination, corruption and unethical businesspractices, as well as promoting the right to collectivebargaining and actively seeking positive involvement withstakeholders and communities.

These criteria are applied in theinvestment screening and evaluationprocess. In addition, EQT also looks forcompanies that are actively part of thepursuit of global sustainability includingclimate and environmental issues.

These fall into two main categories;either their products and services help toprevent or mitigate climate change orother undesirable environmental impactssuch as pollution or deforestation, or insome cases they may provide productsand services that help people and companies deal with

“Already today, ESGconsiderations are anatural part of allportfolio companygovernance and theinvestment process ”

“EQT also looks forcompanies that areactively part of thepursuit of globalsustainability including climate and environmentalissues ”

NORD – cleaning up your businessNORD is a Danish company based in Nyborg and a leading European specialist within sustainable Total Hazardous WasteManagement. NORD runs one of Europe’s leading incineration facilities and offers end-to-end solutions for all types ofhazardous waste.

For over 40 years, NORD has ensured environmentally sound treatment of hazardous waste for the benefit of the environment.Advanced techniques are used, whereby oil, iron and metals are recovered and recycled.

NORD treats approximately 250,000 tons of hazardous waste and oily water per year. The customer portfolio includes manufacturers,processing companies, maritime industry (harbors and offshore), universities, hospitals, waste collectors and workshops.

“Almost all industrial activity produces some sort of hazardous residual. We help our clients minimize their risk and we do it in the mostenvironmentally sound way possible. We also deliver full traceability throughout the process, so our clients know and can show to othersexactly what happened to their waste,” says NORD’s CEO Carsten Fich.

NORD incinerates hazardous waste and in that process generates considerable quantities of surplus heat which is used to producedistrict heating and electricity. NORD tries tominimize its carbon footprint and preparesannually a greenhouse gas protocol that statesthe total emission of greenhouse gases from itsactivities. There is also an online version of a CO2

calculator that allows customers to do a CO2

calculation for different waste types. Thecertificate from NORD is an important part ofcustomers’ calculation of the climatic load fromtheir products or processes.

A new area for NORD is the decommissioningof ships and off-shore rigs. Something which isoften done in Africa and Asia, all too often underpoor and unsafe conditions with scant regard forthe environment. Instead, NORD can offer a fullycontrolled, regulated and documented process,which can be an important part of clients’ CSRwork and profile.

In 2014 NORD received the prestigious EUenvironmental award in the “Internationalcorporate co-operation” category for its successfulclean-up of fire-damaged German container ship MSC Flaminia.

NORD was acquired by the EQT Infrastructure I fund in June 2010. It has since changed its name from Kommunekemi to NORD(Nordgroup A/S). Nord was divested in January 2015.

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StormGeo – a business for every weatherNorwegian company StormGeo has its roots as a weather forecasting service. Since it was founded in Bergen 17 years ago,StormGeo has evolved into a global supplier of decision support for weather sensitive operations in a range of industries.

StormGeo collects data from over 5,000 sources and produces advanced weather forecasts. These form the basis for decision supportservices to a range of industries. Currently the largest are ocean-going shipping and the off-shore industry, including renewable wind energy.

Typically the decision support service is used by clients to minimize risks, optimize operations and lower costs or prepare for extremeweather conditions in order to lessen the impact on operations.

In the case of ocean-going shipping, StormGeo helps the ship’s captain calculate the safest, best, most cost efficient route and speedgiven weather forecasts and the ship’s specific design. This can result in fuel savings as great as 12%, which reduces the client’s carbonfootprint. A shipping company operating around 150 ships typically spends around USD 1.5 billion on fuel alone in a year so the potentialreduction in greenhouse gas emissions and costs is large. Today, StormGeo services around 6,000 ocean-going vessels on a continuous basis,but the addressable market is around 40,000 ships. StormGeo expects the number of ships using decision support and routing services toquickly increase in the coming years.

“Ships get better data connections, fuel emission standards get tighter and ship owners are also becoming more environmentally awareso the number of ships using these services will increase,” says Erik Langaker, Chairman of the Board at StormGeo.

StormGeo also plays an important role in the emerging off-shore wind power industry by supplying weather forecasting and decisionsupport that allows efficient operation of wind parks and also minimizes the risk for damages.

“For operations like these, weather conditions are crucial and I think we have only seen the beginning of off-shore wind power. We arewell positioned to take a leading role in this green revolution,” StormGeo’s CEO Kent Zehetner explains.

StormGeo was acquired by the EQT Mid Market fund in April 2014.

or prepare for the often very diverse effects from climatechange and global warming.

By investing in companies that arean active part of a global movementtowards greater sustainability,environmental concern and reductionof greenhouse gases, EQT cancontribute to a positive developmentwhilst remaining commercially viable.Solutions to sustainability orenvironmental issues are one of thefastest growing and most sought aftersectors today.

“Obviously, the company as a whole and its business

model are at the center when an investment is made, butthe business aspect of ESG considerations have quicklyentered center stage for EQT in the investment process,because it helps in building more resilient companies andmakes very good business sense,” Thomas von Kochcontinues.

Principles and policies are critical, but it is when theyare put into practice that the approach truly shows howthe private equity ownership and business model canunleash tremendous value driving the sustainabilityagenda. The cases of NORD, StormGeo and Scandic givemore insight on how three EQT portfolio companies work with sustainability and ESG matters.

“Solutions tosustainability orenvironmental issuesare one of the fastestgrowing and mostsought after sectorstoday ”

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Scandic is the leadinghotel chain in theNordic region withapproximately 230hotels in eightcountries and 13,000employees. In 2014, itwas voted, for thefourth consecutivetime, the mostsustainable hotel chainby 9,000 consumers inSweden in a survey bySustainable Brands. The Sustainable BrandIndex is Scandinavia’slargest annual brandsurvey focusing onsustainability.

Scandic’s sustainabilitywork dates back to 1993.Today, Scandic has theleading program and is atrendsetter in the industry.Currently Scandic hasalmost 160 Swan eco-labelled hotels, all electricity comes from renewable sources and Scandic is working to eliminate net fossil carbon dioxide emissionsaltogether.

In 2007, Scandic was the first hotel chain to introduce the key figure of fossil carbon dioxide per guest per night. This was possiblebecause Scandic had put a great deal of effort into making sure that each hotel could report how the energy they used was produced(wind, hydro power, oil, coal or other). In those days, an average night at Scandic produced 2.9 kilos of fossil CO2 per guest. As oftoday this has been reduced to 1.4 kilos for comparable hotels. Scandic’s target is to make that zero by 2025.

“It is an ambitious target but we are convinced we can get there. Scandic’s track record so far is evidence of that. The key is ofcourse to have staff and management fully committed to these targets and feel they are doing something important,” says FrankFiskers, CEO of Scandic Hotels.

Scandic can today measure its environmental impact live and on its website customers can see the current status and alsocalculate their own impact and carbon footprint. Since 1996, Scandic has cut energy consumption per guest night by 34%, waterconsumption has been reduced by 29% and fossil CO2 emission per guest night have been cut by 69% to 1.4 kilos in 2014.

Scandic was acquired by the EQT V fund in April 2007.

Scandic – the most sustainable hotel chain in the Nordic region

Thomas von Koch Thomas von Koch was part of the team that founded EQT Partners in 1994 and as from March 1, 2014, Thomas is Managing Partner.

Thomas graduated from the Stockholm School of Economics in 1992 with two majors (Financial Economics and Accounting &Finance). Prior to joining EQT, Thomas worked at Investor AB which he joined in 1992 to work in equity research, corporate finance andmergers and acquisitions.

Therése Lennehag Therése Lennehag joined EQT Partners as Investor Relations Controlling Manager in May 2009 and was promoted to Head of ResponsibleInvestment in 2014.

Therése holds an M.Sc. in Economics and Business Administration from the Stockholm School of Economics. Prior to joining EQT,Therése most recently worked as an Associate at Morgan Stanley's London and Stockholm offices in the investment banking divisioncovering and executing transactions for clients in the Nordic region as well as working closely with EMEA IBD management.

Therése is a member of the board of directors of EPER, the large private equity platform of EVCA (the European Private Equity &Venture Capital Association) (since June 2014), as well as a member of the EVCA Responsible Investment Roundtable. Between May 2011and December 2014, Therése served as member of the EVCA Professional Standards Committee and between January 2013 and December2014, she was Chairwoman of the EVCA Responsible Investment Roundtable.

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Responsible investment in private equity:a clear opportunity

Misperceptions have abounded for toolong about private equity and responsibleinvestment. Most institutional investors

wanting to take account of environmental, socialand governance (ESG) factors focused initially ontheir listed equities investments. In contrast, theimplementation of responsible investment policies

in relation to their allocations toprivate equity and other alternativeasset classes is still “unchartedterritory for many pension funds”.

Recognition of two importantpoints has been lacking. Firstly, privateequity has inherent corporategovernance advantages which enablemanagers to be more effective andmore responsible owners of companiesand assets on behalf of their clientsthan public markets investors. Secondly,recognizing that there is a range of

ways in which ESG factors can be relevant for privateequity investment enables more effective responsibleinvestment implementation.

Partners Group’s experience as a private marketsmanager in private equity, private debt, privateinfrastructure and private real estate provides a good basisfor illustrating these corporate governance advantages andthe different ways in which ESG factors can be relevant.

The inherent corporate governanceadvantages of private equity One of the biggest hurdles facing private equity limitedpartners (LPs) is the perceived lack of transparency in theinner workings of private equity, often described as a“black box”. Ironically though, behind the scenes, privateequity managers (general partners) actually enjoy muchgreater transparency than public markets managers whereit counts, i.e. in their relationship with their portfoliocompanies. In fact, this transparency is directly attributableto the typical long-term ownership model of private

equity, whose inherent corporate governance advantagesmean there is far greater potential for private equitymanagers to act as a positive agent for change with theirinvestments than public markets managers, as the tableopposite shows.

The best-performing private equity managers use thetransparency of information and inherent governanceadvantages available to them to their full potential to drivefurther value creation in their investments. Partners Groupresearch conducted by the firm’s Private Equity Teamconcluded that 75% of expected value creation by leadingprivate equity firms is generated by direct operationalimprovements within portfolio companies.2 Research fromthe firm’s Industry Value Creation Team meanwhilehighlights that across all portfolio companies, more than70% of this operational value creation is ultimatelygenerated through top-line improvements.

“ recognizing there is a range of ways inwhich ESG factors canbe relevant for privateequity enables moreeffective responsibleinvestmentimplementation ”

Adam Frost, Responsible Investment Manager, Partners Group

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Different ways in which ESG factors can be relevantMost perceptive private equity managers and LPs nowrecognize that ESG-focused initiatives can directlycontribute to the top-line improvement generated duringthe investment period, enhancing investment returns, aswell as managing ethical or reputational risk. The differentlevels at which ESG factors are relevant to private equityinvestments and can contribute to value creation efforts ismade transparent in the chart below. How this frameworkworks in practice is illustrated by describing how these ESGfactors have been integrated into current investmentsmade by Partners Group on behalf of its clients.

1. Mitigate ethical & reputational riskAction is one of Europe’s fastest growing non-fooddiscount retailers. It is headquartered in Holland and hasmore than 500 stores in four countries. The nature ofAction’s business exposes it to the risk of poorenvironmental or labor standards in its supply chain. Themajority of its stock is procured indirectly from over 400suppliers, around 60% of its stock is sourced fromcountries in Asia with high supply chain risks, and over200 new products are introduced each week. Recognizingthese risks, Partners Group’s responsible investment teaminitiated a project with Action in 2013 to ensureresponsible practices in its supply chain. Although Actionhad never faced negative reputational incidents from its

supply chain, an initial benchmarking against otherdiscount retailers identified opportunities to furtherimprove its supply chain management. The projectresulted in Action introducing a responsible procurementpolicy, hiring a responsible procurement manager, andimplementing enhanced monitoring of supply chainstandards for all its suppliers. Action was voted byconsumers as the “Retailer of the Year Europe” for 2014-15. Partners Group is helping Action to maintain thisexcellent reputation amongst consumers through thesupply chain management project.

2. Mitigate investment riskIn 2013, Partners Group completed a direct infrastructureplatform investment on behalf of its clients in Fermaca, aMexican gas pipeline business, with plans to expand thebusiness in the US and Mexico. This asset contributespositively to Mexican economic development by supplyingaround 20% of Mexico’s gas: a low-cost, low-carbon formof energy. However, Partners Group recognized that ESGfactors such as corruption, operational safety andcommunity relations posed potential risks to investmentreturns that needed to be reviewed and mitigated duringdue diligence. We undertook a thorough assessment of thecharacter and standards of the management team. Thisconcluded that Fermaca has a clean track record androbust measures in place to mitigate the risk of corruption.Secondly, we were encouraged that Fermaca had a zero

Corporate governance: private equity v. public equity

Partners Group’s ESG integration methodology

Source: Partners Group, 1) “Relief on the emerging markets front, but bigger questions loom”, Financial Times (21 January 2014)

2) PIRC quoted in written evidence from Cevian Capital (UK) LLPs submission to Kay Review (2011)

3) “Patience and Finance”, speech by Andrew Haldane (2010)

Source: Partners Group

Information

Private investors

In depth: full access toinformation on firmsduring due diligenceand ownership

Large, concentratedshareholdings: morecontrol and betteralignment of incentives

Long-term ownership:enables long-term valuecreation

Public investors Examples

Influence

Patience

Limited: only publicinformation available toinvestors

Limited: small,fragmentedshareholdings hampercoporate governance

Short: increasingly shortterm focus impedeslong-term value creation

A leading global consumer goodscompany reporting neither assetsemployed nor return on capitalacross its divisions1

No UK FTSE 350 boarddirector candidate proposedfrom 2006-2010 was notapproved by the shareholders2

Average duration of US & UKpublic equity investors’ holdingshas fallen to 7 months3

1

1

3

3

2

2

4

5

4

5Identify additional

investment opportunity

Create additional valuefrom investments with ESG

Create positiveenvironmental

& social benefits

Ensure that investmentsrespect and, where possible,benefit society and theenvironment

Protect and enhanceinvestment returns

+ =

+

+=

Mitigate investmentrisk from ESG

Mitigate ethical & reputational risk

Levels of ESG integration

Val

ue

add

ed

Proactive}}

Defensive

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accident rate during its nine years of operations. Thirdly, wewere impressed by Fermaca’s collaborative approach toworking with local communities and land-owners alongthe pipeline route. It manages the negotiation andprocurement of rights of way in-house, which reduces therisk of bribery or mismanagement. Partners Grouptherefore gained sufficient comfort that the potentialinvestment risks were sufficiently well-managed to warrantproceeding with the investment.

3. Create positive environmental or social benefitsThe North West Rail Link (NWRL) is Australia’s largestpublic transport infrastructure PPP and will deliver a 36kmrapid transit service connecting Chatswood on Sydney’sNorth Shore to Sydney’s north-western suburbs. In 2014,Partners Group announced a direct infrastructureinvestment on behalf of its clients in the NWRL as part of aconsortium of investors. It includes the building of 15kmof twin tunnels, eight new railway stations and 4,000commuter car-parking spaces, as well as the upgrading

and converting of an existing railwayline. NRWL is expected to be operationalin 2019 and will be the first fully-automated rapid transit service inAustralia. It will reduce constraints onexisting transport networks; in fact,during the morning peak rush hour it isexpected to take 12,000 cars off theroad. The improved transportationinfrastructure will also encourage

businesses and employees to locate in the area. More than26,200 additional jobs are expected to be created inNorwest Business Park following the arrival of the NWRL.

4. Create additional value from investmentsThe work that Partners Group undertook to enhance thesustainability of Kowloon East, a real estate investmentmade on behalf of its clients in 2013 in Hong Kong, is agood example of how a company or asset can bereconfigured in a way that delivers environmental orsocial benefits and increased investment returns. KowloonEast, previously a largely industrial zone, is emerging asan important office area after the Hong KongGovernment launched an initiative to transform it into anaffordable, alternative central business district (CBD) toHong Kong Island. Aligned with the government’sstrategy, Partners Group and its operating partner set outto convert a former industrial warehouse building into aclass A office building with a modern design. An integralpart of the redevelopment plan is for the building to meethigh environmental sustainability standards, in fact the

aim is for it to be one of the first industrial conversions inHong Kong to receive a BEAM Plus sustainability rating, agreen building standard recognized by the Hong KongGreen Building Council. Once completed, the building isexpected to have energy usage over 20% lower thancomparable properties. After the conversion, the officebuilding would be suitable for large occupiers from arange of sectors seeking premium office space at moreaffordable rents than those offered in Hong Kong Island’sCBD, but higher than the original industrial building,allowing for favorable investment returns to our clients.

5. Identifying investment opportunitiesLong-term environmental and social trends can createstrong demand for products and services that drivecompanies’ growth. The need to manage growing socialservices expenditure in aging developed countries is agood example. For example, the number of people in theUS aged 50 and over is expected to be 70% higher in2030 than it was in 2000. This puts pressure on healthcarecosts as elderly people tend to have greater medical needs.It is forecast that expenditures on healthcare in the US arelikely to reach about 29% of GDP in 2040, compared toabout 15% in 2008. In 2014, Partners Group made adirect equity investment in MultiPlan, a leading provider ofhealthcare cost management solutions in the US, onbehalf of its clients. With a network of over 900’000healthcare providers and extensive proprietary analytics,MultiPlan generates over USD 11 billion in medical costsavings on about 40 million claims annually. It thereforebenefits individual consumers while also reducing pressureon healthcare expenditure in the US. Partners Group’sconviction in making the investment in Multiplan wasdeepened by the fact the company addresses a long-termsocietal need.

Rising to the transparency challengePrivate equity investors have an opportunity to be moreresponsible and more effective investors than publicequity investors. This opportunity isbased on their inherent corporategovernance advantages of betterinformation, higher influence and longerholding periods. These advantagesenable private equity managers to useESG factors to mitigate investment risks,enhance investment returns and ensurethat the assets and companies in whichthey invest operate transparently in away that respects and where possible benefits societyand the environment.

Adam Frost is Partners Group's Responsible Investment Manager and a member of its Industry Value Creation team, based inZug, Switzerland. He has 16 years of industry experience. Prior to joining Partners Group, he worked at Sarasin and Partners,McKinsey, Apax Partners and BP. He focuses on incorporating environmental, social and corporate governance (ESG) concernsinto the due diligence and investment approval process and maintaining responsibility for ESG initiatives from a corporateperspective. He is also the investment manager responsible for Partners Group’s foundation, Partners Group IMPACT. He holdsan MBA from Harvard Business School, Massachusetts. Adam is on the UNPRI Private Equity Steering Committee and chairs itsworking group on Value Creation.

“during the morningpeak rush hour it (theNWRL) is expected totake 12,000 cars offthe road ”

“Private equity investorshave an opportunity tobe more responsible andmore effective investorsthan public equityinvestors ”

1 “Benchmark Responsible Investment by Pension Funds in the Netherlands” VBDO,2013. 2 “Understanding Private Equity’s Outperformance in Difficult Times”, Partners Group, January 2012

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There is a growing conviction within the privateequity and venture capital community thatresponsible investment is a logical extension of

our primary objective as investors to build better andmore sustainable businesses. Whilst investors andtheir portfolio companies have long been aware of theneed to account for their wider social impact, arecognition that the proactive management ofenvironmental, social and corporate governance (ESG)

matters generates and maintainsvalue has ensured that theresponsible investment agenda nowsits at the core of our industry.Indeed, a recent survey1 of 42 privateequity firms by the London BusinessSchool found that 38, or 90.5 percent, had adopted ESG policies. As an

asset class private equity is particularly well suited tointegrating this approach given its hands-on, activestewardship of businesses and long-term ownershiptimeframe. This has meant that as responsibleinvesting has shifted from a focus on reputationalissues to one of improving financial performance,firms have been able to implement transformative ESGstrategies across their portfolios swiftly and effectively.

The transition to a more rigorous form of responsibleinvestment has been driven by several factors. As mentioned,General Partners (GPs) have recognised the opportunity forvalue creation across the investment cycle, employingcoherent and structured frameworks to reduce costs andminimise risks whilst securing opportunities such aspromoting supply chain sustainability and improvingemployee engagement. At the same time, Limited Partners(LPs) have pushed for private equity firms and private equitymanagers to demonstrate their commitment to ESG issuesthrough non-financial performance. Many have signed up toschemes such as the UN Principles for ResponsibleInvestment to highlight their view that investor activityshould be better aligned with broader objectives of society.Increased legislative obligations in the wake of the financial

crisis have strengthened this requirement, with pensionfunds in particular now mandated to consider ESG issues intheir investments as part of their fiduciary duty.

Within global private equity and venture capital theBVCA has been, and continues to be, at the forefront of theresponsible investment agenda. Since the formation of theResponsible Investment Advisory Group in April 2009, wehave sought to encourage the development of the approachwithin our membership and the industry at large. The Groupcomprises both GP and LP investors, intermediaries andsustainability professionals to provide a coherent strategyand firm direction for its work. In order to achieve itsobjective the Group has integrated responsible investmentinto all of the BVCA’s core functions, namely policy andpublic affairs, events and training.

To date, the Group’s most notable output has been theResponsible Investment Guide. First published in 2012 andnow in its second iteration, the Guide aims to serve as areference tool for private equity and venture capital fundmanagers, offering detailed and practical advice accompaniedby a number of concise case studies on ESG integration intoeach stage of the investment cycle. It includes informationon how to effectively profile businesses when identifyingtargets; ways to incorporate ESG into detailed due diligence;how to identify priority actions during ownership; and setsout procedures to follow during the exit process in order toenhance value. The Guide has been well received by the

“ the responsibleinvestment agendanow sits at the core of our industry ”

Jeremy Lytle – Chairman, BVCA ResponsibleInvestment Advisory Group; Investor RelationsPartner, ECI Partners

ESG integrationinto PE practice:The UK perspective

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industry and is under constant revision to ensure that itremains at the forefront of sustainability and responsibleinvestment practice.

As a supplement to the latest version of the Guidereleased in 2014, last month we published a series of in-depth case studies to showcase examples of best practice inthe field and highlight how responsible investment can bean important competitive asset. The supplement notablyfeatures 3i’s innovative ESG due diligence tools; Terra Firma’sintegration of sustainable practices in its portfolio companyWyevale Garden Centres; and the development of aResponsible Investment Code by Palatine to enable rigorousESG monitoring and reporting. It remains of greatimportance to the BVCA that our work on responsibleinvestment is shared as much as possible and as such bothof these documents are freely available on our website.

The Guidelines for Disclosure and Transparency in PrivateEquity, published in 2007 and overseen by the GuidelinesMonitoring Group, have provided an important means tomonitor and assess the take-up of the responsibleinvestment agenda and ESG matters by the largest privateequity firms and their portfolio companies. The Guidelinesrequire in-scope organisations to provide enhanceddisclosure of information relating to social and communityissues and environmental matters. Notably, these

requirements were included from theproject’s inception, requiring privateequity firms to match disclosures expectedfrom the public FTSE 350 companies.

The BVCA has also been involved inthe establishment of broader efforts toencourage transparency in the responsibleinvestment space. In 2011, we wereapproached by a group of 39 LPs for oursupport in co-ordinating private equityassociations around the world to developwhat would eventually be known as theEnvironmental, Social and CorporateGovernance Disclosure Framework.

Launched in March 2013, it is currently supported by morethan 40 LPs, 20 private equity associations and a number ofGPs. The Framework aims to provide guidance relating to thechanging and diverse expectations of LPs for the disclosureof ESG information from private equity firms and theirportfolio companies, and to facilitate informed discussionbetween the parties involved. As a result it has provedparticularly useful in encouraging mainstream acceptance ofESG disclosure and ensuring that GPs are aware of the likelydemands of LPs.

Alongside guides and frameworks, the BVCA recognisesthe importance and value of highlighting responsibleinvestment through events and training programmes. Ourflagship Foundation Course, designed for junior investmentprofessionals, includes a session on the topic ensuring thatrecent entrants into the private equity industry are madeaware of the ESG agenda and its growing importance to

GPs and LPs alike. Ever keen to reach as large an audience aspossible, the topic has also been incorporated into thepopular annual BVCA Summit, which was attended by over700 individuals last year. The most recent panel discussed‘responsible investment in action’, providing delegates withthe opportunity to hear about the first-hand experiences ofGPs, LPs and portfolio companies in their management ofESG issues. Again recognising the import ance ofinstitutional investors in the broader responsible investmentrelationship, the BVCA also holds regular investor relationsfora which allow IR professionals and partners to shareknowledge and exchange ideas on best practice.

Whilst providing our members with guidance on ESGintegration is our core objective, we also believe that it is vitalto champion and celebrate the best our industry has to offer.This is achieved through the annual Responsible InvestmentAwards which were launched in 2011. Presented at theBVCA Summit, the Awards demonstrate the growingcommitment to responsible investment with a greaternumber of submissions received each year. Members areencouraged to enter under two categories: demonstratingan ESG framework in place, and active ESG engagementwith portfolio companies. To encourage participation bysmaller private equity and venture capital houses these aresplit into two groups, with separate awards for firms withless and more than £1bn under management. 2014 sawPalatine, Northedge Capital and Terra Firma rewarded fortheir efforts, with all three having demonstrated how ESGpractices feature at the core of their operations. The 2015Responsible Investment Awards will be launched in thespring and we hope to see a continued improvement of theimpressive work submitted in past years.

Since the publication of our first Responsible InvestmentGuide in 2012, the number of private equity and venturecapital firms engaging with ESG issues has grownsubstantially. Nevertheless, the BVCA remains dedicated todemonstrating how such an approach makes real businesssense, complementing our industry’s existing efforts tocombine strategic, financial and operational expertise togrow better companies. Over the coming months and yearswe will continue to develop our engagement with GPs, LPsand associated professionals, providing information andinsight through our guides, highlighting best practice withour events, establishing benchmarks through guidelines andcelebrating success at the annual Responsible InvestmentAwards. All of these efforts recognise that the wider debateconcerning the role of business in society, and in particularthe contributions of the financial sector to our nationalprosperity, is not going to fade. Private equity and venturecapital firms have actively embraced this reality, leading ourindustry on a path to a more socially aware and financiallysound future. As such, the BVCA and its members arecommitted to shaping a more responsible capitalism.

1 Source: Ioannis Ioannou, Francesca Cornelli, Thomas Zhang (2015) ‘ESGmoving out of the compliance room and into the heart of the investmentprocess’. The Coller Institute of Private Equity, London Business School.

Jeremy Lytle is ECI’s Investor Relations Partner. He joined ECI in 2007 having spent the previous three years as COO at FMCapital Management Limited. Before that, he spent seven years with Cazenove Capital, and had an early career in the BritishArmy. Jeremy is currently Chairman of the Responsible Advisory Board of the British Private Equity & Venture CapitalAssociation (BVCA), the industry body and public policy advocate for the private equity and venture capital industry in the UK.

“ the Environmental, Social and CorporateGovernance DisclosureFramework . . . iscurrently supported by more than 40 LPs, 20 private equityassociations and a number of GPs ”

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Privateequity inAfrica -buildingbetterbusinesses

Responsible Investor speaks to Erika van derMerwe, CEO of the Southern African VentureCapital and Private Equity Association

(SAVCA) on the recently launched SAVCA Case StudyCompendium, which demonstrates how SouthernAfrican private equity firms are upliftingenvironmental, social and governance factors in thecompanies in which they invest.

Q: What is driving this increased focus on ESG issuesin the private equity industry?

A: To a large extent this process is driven by institutionalinvestors into private equity funds – referred to as limitedpartners – who are paying increasing attention to howthese issues can influence the future value of theirinvestments. There is a clear understanding that a tighthandle on ESG issues is a good indicator of the success,sustainability and financial performance of these investeecompanies. Internationally, there is a groundswell towards

responsible investment practises in the industry; a measureof this is that more than 130 limited partners aresignatories of the UN Principles forResponsible Investing.

This focus by capital providers tofunds has meant that private equity fundmanagers, or general partners (GPs), havesought out best practice in measuring,improving and monitoring ESG factors atthe portfolio company level.

Private equity is highly conducive toresponsible investment owing to the long-term nature ofits investment and its hands-on management approach.The typical holding period by a fund of a portfoliocompany is three to seven years, which gives fundmanagers time to influence company management andimplement ESG initiatives. An understanding of and carefulmanagement of ESG matters is also one the mechanismsthat private equity fund managers actively use to add realvalue to their portfolio companies.

“ Internationally, there isa groundswell towardsresponsible investmentpractises in theindustry ”

Erika van der MerweCEOSouthern African Venture Capital andPrivate Equity Association (SAVCA)

INTERVIEW

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Q: How do Southern African private equity firmscompare with their counterparts in other regions interms of ESG implementation?

A: The Southern African market is a sophisticated businessenvironment, known for high levels of corporate

governance standards, a focus onsustainable social practices and stringentenvironmental legislation. As a result,the appreciation of the significance ofsensible ESG practices is advanced.

Moreover, the standards imposed byinstitutional investors into SouthernAfrican private equity – investors whorange from local and internationalpension funds to development financeinstitutions from various developedmarkets – guarantee that private equityfund managers remain accountable fortheir ESG practices and outcomes at alevel that is consistent with practicesacross global jurisdictions.

Q: How does incorporating ESG practices bolster the return profile?

A: Private equity firms invest with an exit in mind andtangible improvements to ESG standards do help to securea better valuation at the disposal stage. Multinationals areincreasingly looking to have a presence on the continentand acquisitive growth is an obvious route to achievingthis. These types of buyers are concerned that thecompanies in which they invest have good governance and

world-class risk management systems inplace, as well as good ESG andsustainability policies.

Q: Finally, give us some examplesfrom the recently released SAVCACase Study Compendium?

A: The SAVCA Case Study Compendiumprovides 16 in-depth examples of howprivate equity investors are makingmeaningful contributions to ensure

improved ESG outcomes in the businesses with which theypartner. The case studies are taken from across the industryspectrum, including agriculture and food, infrastructure,retail and services, and manufacturing. Each case studydemonstrates how smart investing, careful planning andconsidered management can have far-reaching andmeaningful influence. For instance, there are examples ofprivate equity investors introducing energy efficiency

programmes, including the use of renewable energysources; there is an emphasis on sustainable and ethicalpractices for a firm in the farming and fishing industry; andthere are examples of investments that facilitatecommunications and connectivity, andthat address housing shortages, foodsecurity and rural health issues.

Across the sectors, this researchdemonstrates a central focus for privateequity investors in raising corporategovernance standards and sharpeningstrategic thinking in the boardroom. Thereare examples of how portfolio companiesare supported to become compliant withSouth African governance standards, theKing III codes, as well as industry-specificcodes and principles, and moves to professional levels offinancial reporting. There is also a near-universal adoptionof occupational health and safety measures that protectthe wellbeing of employees. These measures ultimatelycontribute to better and more investable companies.

The 2015 SAVCA Case Study Compendium can bedownloaded from the Responsible Investor website atwww.responsible-investor.com/reports.

“buyers are concernedthat the companies inwhich they invest havegood governance andworld-class riskmanagement systemsin place ”

“ there are examples ofprivate equity investorsintroducing energyefficiency programmes,including the use ofrenewable energysources ”

“The Southern African market is asophisticated businessenvironment, knownfor high levels ofcorporate governancestandards, a focus onsustainable socialpractices and stringentenvironmentallegislation ”

Erika van der Merwe is CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), the industrybody for private equity and venture capital in Southern Africa. SAVCA has over 130 members and represents about R160billion in assets under management. Erika holds the Chartered Financial Analyst (CFA) accreditation, has a Master’s degree inEconomics from Cambridge University and an M.Com in Economics from the University of Natal. Erika’s career has extendedfrom economic analysis within the asset management industry, financial journalism and now a leadership position at aprivate equity association.

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