Vindi Banga, writing for the WeForum website, believes that private equity can be an important actor in promoting ESG best practices across their global portofolios.
Here's why:
Private equity wants growth
„Lower cost will, of course, increase margins and provide some value. However, I believe growth is valued far more than margin; hence, high performing private equity owners seek to increase the trajectory of growth in a sustainable manner during their period of ownership. Those that are successful are generally rewarded with a higher valuation”, writes Vindi Banga on WeForum.
Allignment of management and shareholder for change
„Transformations are usually complex and involve investment, which may depress short-term profits. It's important that shareholders and management are aligned for the duration of the transformation”, says the expert.
„Quality management will counter these forces by nimbly adjusting their plans and efforts, thereby achieving longer-term goals albeit with shorter-term volatility”, adds Banga.
Private equity can transform ESG into excellence
The partner at Clayton, Dubilier & Rice believes ESG considerations need to be incorporated into strategy and are closely linked to operational excellence, which is a core part of many private equity value-creation models.
„They (private equity) understand that following a responsible ESG strategy has the potential to do more than reduce reputational risks, thereby creating the perception of a well-led and managed company with a concomitant premium valuation”, says Vindi Banga.
„I believe such firms can incorporate ESG into their business-building tool kit -- as much as growth, productivity and cost reduction. And they recognize when this is done well, it could lead to an ESG-embedded value multiple, just as firms talk of high growth companies securing a growth multiple”
The net asset value across private equity portfolios is about $5 trillion and growing, turning over every four to five years.
Any thoughts?