Looking for the Exit: Investors Find Value in ESG

Authors

• Laura Ediger

  Former Associate Director, BSR

Laura Ediger, Associate Director, BSR

Private equity investments in Asia are not yet providing the returns that optimistic fund managers and investors were looking for, and with the slowdown in IPOs, much of the discussion at last week’s Private Equity Investment Forum in Hong Kong was about exit options. Trade sales are proving to be an important alternative, but the shift from IPOs to trade buyers doesn’t necessarily mean less emphasis on environmental, social, and corporate governance (ESG). While trade sales typically take advantage of growth opportunities, according to a recent report from Principles for Responsible Investment (PRI), many are also looking at management of ESG issues as a factor in deal decisions and negotiations.

In the absence of a quick flip, general partners are also talking more about earning value through long-term management—not looking for returns in just three years but more like 10. Derek Sulger from Lunar Capital spoke about his fund’s focus on "intensive operational" investments. Lunar Capital works closely with their portfolio companies to build a strong culture of accountability and good governance, including simple things like conducting regular board meetings. These efforts are being rewarded through both improved company performance, and also through reduction of reputational risk.

For consumer-oriented companies in China, reputational risk is of increasing concern as public awareness and access to information grow. For example, iPhone users can now download an app called "China Survival Guide" (中国 求生手册), which lists and rates different products based on food scandals. Similarly, Weibo (the popular Chinese microblog service) has become an incredibly efficient mechanism for rapidly spreading news, whether true or false. For the last four years, BSR has been conducting media analysis of portfolio companies in China to help investors evaluate and manage risk by understanding company performance as well as public perceptions.

Another speaker mentioned that while it’s not easy to directly track the financial value of effective management of ESG issues within a company, it’s hard to find a company that has excellent performance on ESG but is falling apart on the operational side—not causality but correlation. And while trade sales and longer-term management prevail, the incentives are aligned for investors to implement and expect robust ESG management as part of the package.