Monday, March 26, 2012

The Private Equity/ Sustainability Link

Private equity trying to redefine itself vs having an open and transparent business model to begin with! Aivars Lode


Private equity often gets a bad rap these days. But David M. Rubenstein, a co-founder and managing director of Carlyle Group, argues that private equity can help companies become more sustainable and socially responsible. And that, in turn, can help companies make even more money.Mr. Rubenstein discussed Carlyle's efforts with Jennifer S. Forsyth, the Journal's national editor. Here are edited excerpts of their discussion:
The private-equity giant recently teamed up with the Environmental Defense Fund and a consultant, Payne Firm, to incorporate environmental considerations in its due-diligence process. It's part of the firm's efforts to consider environmental, social and corporate-governance (ESG) principles in the way it invests.
MS. FORSYTH: Private equity has been in the news quite a bit. There have been accusations that private-equity firms, in striving for greater efficiency, squeeze companies to the point that they might imperil them down the line. One stated goal of the Carlyle Group is to invest with social responsibility, to be ethical in your investing. So explain to us how a private-equity firm can be socially responsible at the same time.
[RUBENST]Genesis Photos for The Wall Street Journal
DAVID M. RUBENSTEIN: 'Sustainability equals more cash flow.'
MR. RUBENSTEIN: Well, the implication of the question is that a private-equity firm couldn't be socially responsible. And that reflects the image that we probably have. Private equity is an industry that grew up in the U.S. over the past 40 years or so. And the reason it's grown is because private-equity firms have been able to earn for their investors, most of whom are large public pension funds, rates of return that are higher than anything else that they can get with their money.
Historically, when I went out to raise money I would say to investors, "Here's our rate of return, and here's why it's very high," and they would give me money. In recent years I've noticed that investors aren't interested only in rates of return. We understand that investors are interested in things that are more socially responsible. So we adopted ESG principles, and we became the first private-equity firm to establish a set of guidelines under which we will operate and analyze our companies.
MS. FORSYTH: But do you make as much money?
MR. RUBENSTEIN: There's no way to really know for sure. We try to operate under the principle that, if we do things that improve sustainability, in the end that's a good thing for humanity. It's a good thing for our investors. It's a good thing for the company. And in the end profits will be realized.
Einstein famously said, "e equals MC squared." In my view what we should say is "S equals MC squared." Sustainability equals more cash flow. And if you are willing to put in the time to improve the sustainability principles of a company, you can in fact make more money.
MS. FORSYTH: One of the things smaller, closely held companies sometimes deal with is that they want to make their operations more energy-efficient, for example, but it may require a capital investment. And either they don't have the cash on hand or they don't have the debt available to do that. It's my understanding private equity doesn't have that problem, and you can make those kinds of investments. Can you give an example of a company you bought where that really played out?
MR. RUBENSTEIN:In the U.S. we teamed up with the Environmental Defense Fund and developed something called EcoValuScreen. When we look at buying a company we can say, "Here is where there are energy and environmental liabilities, but here's also where there's energy and environmental opportunities."
In the old days when we would buy a company we would say, "What are the risks we're going to take in the environment? What are the risks we're going to take in the energy area?" Now we say, "How can we improve these areas and how can we actually make money doing this?" Now if we take a look at a company and say it will take us 10 years or 15 years to improve the environmental sustainability of the company, we're probably not going to make an investment that will take 15 years to be paid back.
MS. FORSYTH: Because you don't typically hold it that long?
MR. RUBENSTEIN: Private-equity firms typically hold things for four to six years, because often our investors want to recycle and get profits back in that period of time.
But if we can look at something and say, "If we made some improvements in the environmental area or the sustainability area, and if we could make our money back in two or three years," then of course we would do that.

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