Private equity fund managers are increasingly prioritizing ESG businesses when directing their funds. A BDO’s Spring 2022 Private Capital Pulse Survey found that half of the managers said they would direct the most capital toward impact funds or ESG-focused targets.
This is more than the 14% of managers who would direct funds for equity relief of portfolio companies and the 12% who would direct the majority of funds to new deals.
“Adopting an ESG strategy and reporting program is among fund managers’ top five new tactics they are employing during the holding period to facilitate exit strategy,” noted the report.
” Having a compelling ESG story — and the data to support it — is becoming a vital component to the sell-side. Showing how ESG weaves into the business model and offers benefits protects an asset’s long-term value and increases exit value.”
The survey found that data analytics is fund managers’ number one tactic in measuring ESG performance. It allows it to manage portfolios more efficiently, maximize return on investment, and make data-driven decisions. In addition, it helps reduce the time between acquisition and exit, provides forecasts on exit scenarios, and assesses the impact of sector trends and pricing changes on top-line growth.
“This and other findings of the survey, which polled 200 U.S. private equity fund managers, underscore that the asset class has moved beyond tacking ESG initiatives onto their activities to fusing ESG with core fund strategy,” noted BDO.
The consulting firm’s survey was not specifically designed to focus on ESG. But across the questions asked regarding deal-making, value creation, and exit planning, “implementing ESG strategies clearly emerged not just as a unifying theme but as a solid strategic underpinning that fund managers are pursuing,” BDO said.
Among the fund managers, 99% said they had identified an ESG strategy. Forty-nine percent said the primary objective of their ESG strategy was attracting and retaining talent. Forty percent were using ESG to improve portfolio performance and resilience. Thirty-three percent planned to get a higher valuation at exit.
“Limited partners and the public at large have been clamoring for ESG action, and funds are responding. As funds take a more hands-on approach to value creation, they become more than just a financial lifeline for their portfolio companies; they become a strategic partner, committed to the business’s long-term success: Among the fund managers who said they are raising an impact or ESG fund, 46% said their top post-M&A challenge was improving performance,” said Verenda Graham, tax partner, and National Private Equity Practice Co-Leader.
BDO found that most fund managers reviewed ESG criteria during due diligence. Fifty-four percent perform a high-level assessment, while 41 percent say they did an in-depth assessment in the initial stages of reviewing their target. Fewer than 1% said they did not do any assessment.
“Funds may choose to invest in companies that perform well on ESG metrics — and make them even better — or they may choose to partner with businesses where managers can leverage their ESG know-how to help portfolio companies improve their ESG posture,” added Graham.