Even incredibly successful products, services, and business models need to be reinvented from time to time to remain competitive. You might browse using the latest and greatest version of some new technology – Windows 7, Internet Explorer 8, the BlackBerry Torch, or the new iPad 3G.
These updates are happening faster than ever and not only in the technology space. Today's changing world and challenging economy is forcing all businesses to make adjustments. The private equity industry in particular has been plagued by a number of challenges, including an investor community much less willing to write cheques, much more selective and demanding of transparency. Firms are also facing greater regulatory and tax pressures.
Given these challenges, it may seem an unlikely time for the buyout sector to be embracing new thinking on environmental, social and governance matters, but big changes are taking place. Despite being a relatively young industry, this is not the first time the sector has reinvented itself. Many leading firms have already made the shift from focusing on the financial engineering of leveraged buyouts (PE 1.0) to collaborating with management to improve efficiency and operational performance (PE 2.0).
PE 3.0 is the next logical step in the industry's evolution. Adding to traditional PE financial analysis and management disciplines, this approach combines comprehensive ESG due diligence, operational efficiency and environmental innovation to help transform businesses to create cleaner, more productive enterprises. A few industry leaders have already discovered the power of environmental innovation in value creation and are putting it to work throughout the investment process. Over the past few years, Environmental Defense Fund has been working with Kohlberg Kravis Roberts and Carlyle Group to do just that and we are already seeing impressive results, for both the bottom line and the environment.
We teamed up with KKR to develop its "green portfolio programme" to measure and improve environmental and business performance. In its first two years, the programme helped eight portfolio companies adopt innovations resulting in eliminating over $160m in operating costs, 345,000 tonnes of C02 emissions, 8,500 tonnes of paper and 1.2 million tonnes of waste. Based on these results, KKR has just expanded the programme to include 17 companies in seven different industry groups and is developing internal systems to share best practices and measure impacts.
We have launched a second PE partnership with Carlyle, focused on identifying opportunities for value creation during environmental due diligence. The initial result is a new environmental due diligence screen – EcoValuScreen – that systematically incorporates environmental opportunities to improve operations and create value in the early stages of the investment process. Carlyle deal professionals are currently applying the process to new transactions in the US.
Most recently we announced a pilot programme with Ernst & Young to help firms improve their portfolios' financial and environmental performance.
These initiatives are a great start, but are just the beginning of what can be achieved when PE 3.0 practices are adopted across the entire industry. This evolutionary approach can improve due diligence, boost portfolio company performance, uncover new growth and investment opportunities and build stronger relationships with investors and other key stakeholders.
This content was originally published by Private Equity News on January 31, 2011.
