UNPRI: ESG Critical to Private Equity Dealmaking

(January 11, 2013) — Two-thirds of corporate buyers of private equity portfolio companies said that poor performance on environmental, social and governance (ESG) factors impacted their willingness to buy the company or prevented the entire deal, survey results by the United Nations-backed Principles for Responsible Investment Initiative has found.

The PRI commissioned PricewaterhouseCoopers to conduct a survey to assess the attitudes of trade buyers of private equity companies, evaluating ESG risks and opportunities in their M&A activities. The results showed that over 80% of companies had reduced the valuation of an acquisition target or not gone ahead with a deal because of poor performance on ESG factors, while 75% said poor performance in this area had prevented a deal from taking place.

“This report shows why ESG considerations should be a fundamental part of any private equity dealmaking process and how they can affect not only whether a deal happens but also its price,” James Gifford, executive director of the PRI Initiative, said in a statement. “Today, trade buyers are an important exit route for private equity investments and Limited Partners (LPs) are better able to influence fund terms – including seeking commitments on ESG management and reporting from their General Partners (GPs).”

According to Gifford, the PRI has seen growing interest from private equity companies in ESG issues and now counts over 150 GPs and more than 130 LPs as signatories.

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Sixteen corporate buyers from a range of sectors, including Alliance Boots, Centrica, EDF and Xstrata, were interviewed on the following issues: integration of ESG factors into the due diligence process; integration of ESG factors into M&A price, sale and purchase agreements (SPA); and integration of ESG factors in the post-acquisition period. The majority of these companies had made between one and three acquisitions over the previous two years, PRI noted.

“The recent decision by private equity group Cerberus Capital Management to sell its investment in gun manufacturer Freedom Group following the tragic Sandy Hook school shootings in the US underscores the increasing influence of LPs and the growing materiality of ESG issues on investment risk, return and reputation,” said Gifford.

In addition, PRI’s research demonstrated that over half of respondents said they would expect a discount for poor performance on ESG factors, which they noted could impact the value of a company.

Download the PRI’s paper–titled “The Integration of ESG Issues in M&A Transactions”–here.

CalSTRS’ recent decision to sell off its investments in manufacturers of firearms that are banned in California, such as the assault rifle used in the Newtown, Connecticut, school shooting–is reflective of a rising sensitivity to ESG-related issues. “I think we’ve taken appropriate action, given the unspeakable and tragic loss of life that occurred in Connecticut last month-the latest in an ongoing line of similar incidents involving assault weapons and mass casualties,” said Investment Committee Chair Harry Keiley in a statement immediately following the January 9 decision. “This latest incident, which occurred at a school and involved fellow educators and the children we cherish, is a tipping point for CalSTRS and speaks to the correctness of our actions. This is not only the right thing to do but positions us to deal with the financial pressures we anticipate this sector of the industry will face.”

(January 11, 2013) – Canada is ready and overdue for new sovereign wealth funds to preserve its resource wealth for later generations, according to new report from the Canadian International Council.

“I think every province that has revenues from non-renewable resources should set one up,” Madelaine Drohan, the report’s author, told aiCIO. “And the ones that have them should be putting away more money. When the Alberta Heritage Fund was started out in 1976, contributions were supposed to be 30% of oil and gas royalties. Now, if you compare Alberta’s contribution record with that of Norway’s, Alberta would look pretty bad.”

In 2008, the Alberta Heritage Fund was rolled into the Alberta Investment Management Company (AMICo)—one of Canada’s two sovereign funds. AMICo manages $70.8 billion, much of it oil wealth. Quebec’s Generation Fund Managed by Caisse de Dépôt et Placement du Québec, holds $4.3 billion in mineral and hydroelectric profits.

Natural resources belong to the Canadian provinces, which is why a national fund like Norway’s is unlikely to be set up in Canada. But new funds for resource-wealthy provinces like Newfoundland and British Columbia are a possibility, according to Drohan.

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“I think the chances are pretty good more will pop up in Canada,” she said. “It is not likely that they’ll be a national one anytime soon. The federal government does get some direct revenue from mining in NWT and Nunavut, but it’s tiny.”

Drohan’s money is on British Columbia, which benefits from strong forestry, fishing, mining, and hydroelectric industries, to open Canada’s next sovereign fun. Whereas Newfoundland, in contrast, “has made some pretty strong statements against it.”

But if British Columbia or another province decides to take the leap, it’s worth taking the time to proceed as thoughtfully as possible, according to an HSBC Business School professor. In a recent paper, Christopher Balding critiqued a raft of recent funds for being poorly conceived and hindrances to their country’s economy.

“Most original sovereign wealth funds were making valuable economic policy innovations to prevent inflation and macroeconomic instability,” Balding contends. “Most new sovereign wealth funds are being used to distort markets hindering national development. The landscape is dominated by vanity funds that seem better suited for the purpose of joining a sovereign country club rather than funds designed to solve difficult policy and development questions. The highest quality ‘innovations’ in sovereign wealth funds come from some of the oldest funds but are lessons well learned.”

Read Drohan’s entire report here.