The best PE firms lead by example on ESG

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We recently attended the IPEM, SuperInvestor, and SuperReturn conferences in Paris, London, and Boston. It felt great to venture back out into the real world and meet with so many people face to face after so long. There is no substitute for shaking hands and interacting personally, and we look forward to the next opportunity to do this again.

This got us thinking at Palico about how much of the former way of doing business in private equity will return to how it was before 2020. Our instinct for the past year or so has been that we’ll likely settle on something like a hybrid approach. Whether raising funds from investors or meeting management teams for potential deals, PE is first and foremost a people business. So we fully expect some return to the norm.

But over the past 18 months, the industry has also learned a lot about the advantages and efficiencies of a more digitally-led approach. An interview taken at IPEM with Klas Tikkanen, COO of Nordic Capital, on this very topic, caught our attention.

The firm successfully achieved two fundraisings remotely during the pandemic, one a flagship buyout fund and the other a platform extension into the lower mid-market. Tikkanen believes that this virtual approach will stick even as employees gradually travel more to meet people. Interestingly, he adds that—as the world continues to recover—the firm has a high-level, top-down target to halve the amount of travel it was doing pre-pandemic to fulfill its remit as a responsible investor. The aim is to continue using the technologies that have kept the firm connected to its LPs and portfolio company management teams during this recent period. So why give up a good thing?

Getting to grips with ESG


ESG is not going away. It’s arguably the biggest challenge the PE industry is up against. Unlike public companies, which are under the watch of millions of prying eyes, PE portfolio companies don’t face nearly the same level of scrutiny.

That is changing fast, thanks to rising expectations of regulators, in Europe in particular, but also institutional fund investors around the world, who are demanding more of their PE managers. Pension funds, for example, have more than financial returns to think about; they need to be comfortable with how those returns are made. The most obvious way that firms can address ESG is by investing in good, clean, sustainable, socially equitable, well-governed companies.

That should be taken as read. But if GPs have lousy in-house practices, what example does that set? Integrating the same kinds of policies that are expected of portcos into their own operations should be seen as the gold standard. In the same way that the “tone at the top” is considered to be a prerequisite for strong corporate governance, so too should GPs be eating their own cooking. If they are reviewing existing portfolio companies for opportunities to improve their ESG profile before exit, those same expectations should apply to the PE firm itself.

That could mean promoting inclusivity and ensuring fair career progression for staff based on their contribution, not their gender or race, or reducing carbon emissions by limiting all but absolutely necessary travel. As an industry, private equity is only starting out on this journey. It has a long way to go. And what better way to start than leading by example?
 

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About Palico

Palico is the leading digital marketplace for private equity primaries and secondaries specifically designed for fund managers and institutional investors.

Primary Platform: Palico’s primary platform is a comprehensive fundraising solution. GPs have access to a full array of digital tools to communicate and nurture prospective investors, including: Virtual Data Room, Messaging Module, Stats for fundraising performance, and Newsroom. Those tools are complemented with a matchmaking algorithm that alerts a vast LP member base (over 2,800 LP members and counting) of new fund investment opportunities and a notification system that notifies the LP network when the Newsroom is updated with major milestones and events.

Secondary Platform: Palico’s secondary marketplace, designed by PE industry experts, standardizes the process of selling and buying PE fund interests — especially for smaller transaction sizes (~$2 – $20M). The marketplace features nearly all traditional major secondary funds in addition to hundreds of non-traditional/opportunistic buyers. From single family offices to large pension funds, LPs are now a few clicks away from participating in and enjoying the versatility that secondaries provide to their PE portfolios.