Economy
Private equity industry adds weight behind responsible investment
The private equity industry believes responsible investment is “here to stay”, with a recent event in Brussels championing the case for taking long-term non-financial factors into account.
The 2014 Responsible Investment Summit, hosted by the Brussels-based European Private Equity and Venture Capital Association (EVCA) in January, brought together thought leaders, investors and policymakers to discuss the policy issues around responsible investment.
Among the speakers were Wolf Klinz, a German MEP described as the “driving force” behind the European parliament’s position on long-term investment, and Yves Leterme, the former Belgian prime minister who is now number two at the Organisation for Economic Co-operation and Development (OECD).
Michael Collins, public affairs director at the EVCA, felt that delegates were positive about the contribution private equity can play in encouraging a shift towards responsible investment.
“While it is not the answer to all of Europe’s investment needs, it is nevertheless a significant potential player and one that should be encouraged”, he added.
Private equity is an asset class consisting of equity securities and debt in companies that are not publicly traded on a stock exchange. Typically, private equity investment is made by a private equity firm, a venture capital firm or an angel investor.
Collins said that the idea of investing for the long-term was “absolutely hard-wired” into the way private equity functions. Because of the lifespan of the average fund, investors commit to lock their money up for around 10 years. Meanwhile, most portfolio company investments are held for around five years.
“If you think about what private equity is really doing, it’s building companies that will prosper well beyond the period of private equity ownership. It’s building companies that will thrive when the next owner takes control”, he explained.
“The private equity model only works if you’ve built a company that is sustainable and that people would want to invest in. That concept of investing for the long-term and building something for the long-term is right at the heart of what private equity does.”
While the EVCA is keen to note that long-term investment and responsible investment are not necessarily synonymous, it said increased investor interest in environmental, social and governance (ESG) factors meant the concept is on an “upward trend”.
At the Responsible Investment Summit, there were also sessions on tax issues at an EU level, covering things like the Financial Transaction Tax. Delegates heard from speakers such as Heinz Zourek, EU director-general for tax policy, and Sony Kapoor from the thinktank Re-Define.
As for the future of responsible investment, Collins said attendees of the event were keen to emphasise there was no trade-off between investing responsibly and getting decent returns.
He added, “Even more than that, it’s perhaps getting to the stage where investing in companies that have a business model that is sustainable is actually going to be key to their long-term financial health. It’s not just a cost, but actually a driver of performance.
“As we get that greater convergence between the right thing to do from an ESG perspective and the financially rewarding thing to do, we’re only going to see responsible investing grow in significance.”
Further reading:
Private equity firms focusing on ESG risks instead of opportunities, says PwC study
PRI study: ESG factors influence countries’ economic development and sovereign debt
Asset owners crucial in promoting ESG practices