Alt Investments

ESG Mindset Dominates Private Equity Sector

Tom Burroughes, Group Editor, August 18, 2022

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We talk to BDO about a survey it issued recently exploring how private equity limited partners – the investors – think about ESG factors. The survey briefly examines the position of family offices as competitors for deals.

A survey of 200 US private equity fund managers showing how ESG investing dominates much thinking is not remotely surprising to a senior figure at professional services firm BDO.

The firm’s latest survey shows that ESG is an even more dominant concern for investment houses than it was in 2021. And in other findings, it notes that family offices still trail strategic investors and entities such as sovereign wealth funds in competing for the most lucrative deals.

In 2021, BDO found that 94 per cent of private equity fund managers said their limited partners “were clamoring for them to incorporate environmental, social and governance investment criteria into their investment strategies.”

This year, such limited partners say that ESG investments are their top choice for where they plan to direct the most capital, but ESG has emerged soundly as a core value that underpins their broader fund strategies, including attracting and retaining talent and helping to facilitate exits. 

“ESG permeates into everything in the investment world now,” Mike Campbell, tax office managing partner, Private Client Services at BDO, told this news service in a recent call. 

The report about private equity investor attitudes comes at a time when wealth managers’ appetite for private markets is now well known, almost a solid orthodoxy. There’s been a shift toward private from public listed equity markets since the end of the dotcom bubble in 2000. Privately held investments and companies typically require less disclosure and reporting to investors than is the case with companies listed on the stock market. And that creates an ESG headache for investors looking for clear, consistent data on how private firms are managing decarbonization, protecting minorities or other metrics.

Elsewhere in the report, half (50 per cent) of fund managers said they would deploy the most capital to set up impact funds or invest in targets with ESG-focused themes; 79 per cent said they have raised an ESG or impact fund. However, just 12 per cent said that they would deploy the most capital to new deals. Also, 77 per cent said that assets will price higher in the next six months.

Competing for deals
In other findings, BDO found that more than half (53 per cent) of fund managers said most of the competition for deals would come from “strategic buyers” – entities willing to pay more for acquisitions, as they target companies where they see potential for immediate financial benefits. As far as family offices are concerned, they bring up the rear in providing competition for deals.

Campbell, when asked about how family offices’ financial muscle stacks up, argued that FOs would maintain their strategy in searching for deals.  

“Family offices may be more selective and focused on their investment strategies, as opposed to being in the market as much as strategics, other private equity firms and sovereign wealth funds right now,” he said. 

One factor, noticed by this news service in the past, is that family offices have had to become more visible than in the past, partly to capture attention of the hottest PE and venture capital investment firms, and be invited to join in deals. 

It appears that the private equity space hasn’t been able to withstand the headwinds from a volatile global economy. 

The BDO report said: “The deal-making environment continues to be characterized by intense competition for limited quality assets. Buyers have been finding themselves catering to high seller expectations. Last spring, 91 per cent of fund managers said asset prices would rise.”

“This spring, 76.5 per cent said the same. Showing that some modulation has returned to the market, 16.5 per cent of respondents said they expected asset prices to remain the same, versus just 6 per cent who said the same a year ago.”

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