Institutional investor focus on the environmental, social and governance (ESG) aspects of private equity investing continues to increase, with over half – 56% – of European limited partners (LPs) claiming they have rejected potential private equity fund commitments on ESG grounds, according to Coller Capital’s latest Global Private Equity Barometer.
This has increased from the third of investors saying this five years ago. However, there has not been a similar increase among North American and Asia-Pacific investors, remaining at around a quarter and a third of LPs, respectively.
The Barometer, the 35th of a bi-annual series, is based on the views of 102 private equity investors based in Europe, North America, and Asia Pacific including the Middle East, with research undertaken between end-September and mid-November 2021.
The survey also shows LPs foreseeing increased regulation for private markets. A majority – 59% – expects societal pressure to bring about an increase in regulation outside their home market, while 51% of North American LPs expect more regulation in their domestic market. For Europe, the percentage is only 35%.
Meanwhile, almost half – 46% – of LPs believe that offering performance-based incentives for a larger proportion of portfolio company employees would lead to higher investment returns.
According to Gerald Carton, partner at Coller Capital, one example, though not referenced in the survey, is the recent initiative from global investment firm KKR to improve engagement with blue-collar employees in the industrial companies which it buys. This is being done via better safety standards, staff retention instead of lay-offs through the slow season, share option incentives, and early payment of a dividend.
In three years, according to KKR, this has helped lift margins at a typical investee company from the mid-20s to nearly 40%.
Almost all – 89% – of LPs in the Barometer think that most small and mid-cap public companies would benefit from periods of private equity ownership as they grow.
And 80% of LPs also see private equity sponsorship as a positive indicator in assessing the short-to-medium-term prospects of private companies seeking a public market listing.
Co-investing appetite
LP appetite for co-investing is another area that shows no sign of slowing – over half of LPs say they are taking steps to improve their attractiveness as co-investment partners.
Almost all – 90% – of these LPs are trying to increase their speed of decision-making, and around half are looking at other ways of making themselves more attractive, including building their expertise in specific market areas and allowing discretionary co-underwrite capital.
The pandemic has also brought about lasting changes in the way investors conduct due diligence. Over the past 18 months, approaching half of European (44%) and North American (49%) LPs made first-time commitments to GPs whom they had never met face-to-face.
Furthermore, around a third of Western LPs say they are likely to do the same in the next 18 months.
Carton said: “The vast majority of investors have the know-how to use virtual platforms which can satisfy their internal procedures. As travel opens up again however, that percentage may decrease.”
But a new aspect to due diligence is now becoming more common, with 68% of LPs saying they are already checking the social media accounts of individual GP team members, or have plans to do so.
“They are focusing not just on the leadership, but on individuals,” Carton told IPE. “They want to make sure that general partners will be good custodians of their capital and that team members are not involved in activities which could be seen as a distraction.”
Worryingly, 9% of investors – double the proportion of four year ago – said they had already suffered cybersecurity attacks, while 67% of LPs think an attack on their organisations is likely within the next five years.
No comments yet