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Why should private equity care about social impact?

by Shonali Pal

The private equity (PE) industry has been pilloried by critics as greedy, cutthroat, and short-term in its approach to investment. The memory of the “barbarians at the gate” era evokes images of PE fund managers in expensive suits waltzing in, loading companies up with debt, and exiting with their pockets full and communities gutted. With this reputation, one may wonder why PE firms would give any thought to the social impact of their investments.

But a combination of pressure from asset owners and the increasing commoditization of financial skills have led PE firms to increasingly focus on long-term value creation. Both fund managers and their limited partners (LPs) have expressed interest in environmental, social, and governance (ESG) impact and the long-term value that initiatives addressing these concerns can create. Driven by stakeholder pressure, risk management, and the potential for value creation, PE firms have begun to incorporate ESG evaluation into their investment strategies. The reasons for adopting an ESG strategy may vary, but one thing is clear: thinking about ESG considerations is here to stay.

The interest in socially conscious business practices reflects, of course, broader social changes. Nielsen’s 2015 Global Sustainability Report found that 66% of consumers are willing to pay more for sustainable brands. This trend has been partially driven by the rise of millennial consumers, of which 72% are willing to pay a sustainability premium.[1] Millennials have high expectations of the businesses they support and are increasingly looking to “vote with their wallets,” often placing as much emphasis on the values of a company as on the products it offers. The movement has created an immense opportunity for entrepreneurs with a social mission.

This desire to positively impact the world has spread to how investment committees, staff members, and ultimate stakeholders view investment outcomes. In addition to strong financial performance, many asset owners and fund managers now want to be able to tout their positive impact on ESG issues. In fact, as of December 2017, over 1,200 investment managers and 360 asset owners have signed the UN Principles for Responsible Investment.[2]

As the investment world faces increasing questions of social impact, the PE industry is one of the clearest areas of opportunity. Many limited partners (LPs, the investors in PE funds) have been vocal in expressing interest in ESG issues. As early as 2013, a PwC survey found that 85% of general partners (GPs, PE fund managers) said that at least some of their LPs had shown interest in responsible investment.[3] Furthermore, interest appears to be growing. A 2015 PwC survey—just two years later— found that a staggering 97% of LPs believed responsible investment will increase in importance over the next two years.[4]

The demand for impact investment, however, varies across LPs. Barber, Morse, and Yasuda found in their 2017 paper that impact funds faced increased investor demand most significantly from insurance companies (24% increase in demand), banks (22.2%), development organizations (17.7%), public pensions (17.3%), and foundations (11.1%).[5] As the demand for impact grows, even traditional PE firms—that is, firms without a specific impact mandate— are feeling pressure to demonstrate ESG capabilities.

As we noted above, stakeholder pressure and reputational considerations are clearly large drivers of ESG interest for PE firms. Even excluding ideas of public image and moral obligation from the equation, however, accounting for social impact is becoming a profitable investment strategy. In a 2016 PwC survey, 44% of GPs cited risk management as a driver for the incorporation of ESG issues in investment strategies.[6] Considering ESG requires GPs to account for environmental issues, health and safety concerns, or other risks that may have otherwise gone unnoticed during the due diligence process, leading them to arrive at a more accurate price. In fact, a 2017 Capital Dynamics survey found that 54% of GPs had reduced a bid price based on ESG analysis and 32% had paid a higher price based on ESG analysis.[7] GPs have also been incorporating ESG through operational value creation efforts – 14% of the GPs in a 2016 PwC survey identified opportunity for operational efficiency as a driver for ESG management.[8] Because they become owners of their portfolio companies, PE firms are uniquely positioned to have a substantial influence over their ESG impact—for good or ill. Furthermore, as PE firms hold their companies for longer periods—an average of 5.8 years in 2016[9]— their ability to implement and benefit from ESG grows.

Although many firms have found that implementing ESG strategies can effectively create operational value, ESG measurement remains challenging. A 2017 Capital Dynamics survey found that while only 38% of GPs measured the ESG impact on their portfolio companies’ EBITDA, 95% of those that kept these metrics observed a positive impact.[10] One example of the work being done to measure impact can be found in our report, “Impact of Early Stage Equity Funds in Latin America,” a 2016 study that Bella performed on behalf of the Inter-American Development Bank’s Multilateral Investment Fund (MIF).[11] In this study, we performed in-depth research on three of the MIF’s investee funds to identify both the direct impact of the fund managers on portfolio companies in terms of jobs, wages, taxes paid, revenue, and other metrics, and the indirect impact of portfolio companies in their communities in terms of innovation, ancillary growth and job creation, improved VC ecosystem, and benefits to the base-of-pyramid population. Among other findings, we determined that one fund, Brazil-based Vox, increased employment in its companies by 105%. Another fund, Colombia’s Progresa, saw wages in its portfolio companies increase by 61%. NXTP, an Argentina-based firm, supported nearly 400 Latin American entrepreneurs and dramatically increased innovation in its communities. The research in this report provided MIF with a quantitative and qualitative analysis of the extent to which their fund investments furthered their goals of both financial returns and social development.

While MIF-supported funds described above had clear social impact mandates, even traditional PE buyout firms have been interested in measuring the social impact of investments. We recently examined the social impact of ownership by a large global buyout firm on its portfolio companies. We focused on the companies’ wages, workplace safety, innovation, and employment and revenue, using a variety of benchmarks to identify how the companies compared to industry peers and to other PE backed companies in each of these areas. We found that the buyout firm’s companies matched or outperformed industry peers and other PE-backed firms across the board. With this reliable quantitative evidence, the firm could explain the success of its social impact initiatives to stakeholders.

ESG-inspired operational improvements have become a crucial piece of PE value creation strategies. As described above, some GPs have begun to quantify the savings resulting from such initiatives. In future articles, we will explore various methods that have been developed to identify the impact and benefits of the ESG improvements.  Bella is excited to be involved in moving the PE industry forward in tackling the challenge of ESG measurement.

[1] “The Sustainability Imperative: New Insights on Consumer Expectations,” Nielsen, 2015.


[3] “Putting a price on value,” PricewaterhouseCoopers, 2013.

[4] “Bridging the gap: Aligning the responsible investment interests of Limited Partners and General Partners,” PricewaterhouseCoopers, 2015.

[5] Brad M. Barber, Adair Morse, Ayako Yasuda, “Impact Investing,” January 17, 2017, available at

[6] “Are we nearly there yet? Private equity and the responsible investment journey,” PricewaterhouseCoopers, 2016.

[7] “Responsible Investment in Private Equity – A Key Component of Operational Value Creation,” Capital Dynamics, April 2017.

[8] “Are we nearly there yet? Private equity and the responsible investment journey,” PricewaterhouseCoopers, 2016.

[9] 2017 Preqin Global Private Equity and Venture Capital Report.

[10] “Responsible Investment in Private Equity – A Key Component of Operational Value Creation,” Capital Dynamics, April 2017.

[11] Josh Lerner, James Tighe, Steve Dew, Vladimir Bosiljevac, Ann Leamon, Sandro Díez-Amigo, and Susana Garcia Robles, “Impact of Early Stage Equity Funds in Latin America,” April 21, 2016. Available at SSRN: