Why this is important for Private Equity Houses
Sustainability issues look likely to have an increasingly significant impact on the performance of portfolio companies, their valuations and, therefore, private equity owners.
Regulatory developments, such as the CRC Scheme (see below), will increasingly impact private equity houses; investors are becoming more concerned about sustainability and are focusing their investment strategy around more 'sustainable' propositions; and acknowledgement of the legitimate interests of a wider stakeholder group has resulted in private equity becoming increasingly open through initiatives such as the Walker Review guidelines on transparency and disclosure.
For private equity houses, sustainability-related programmes cannot be ignored and may soon be a source of competitive differentiation as well as having significant effects on returns.
Special note: The Carbon Reduction Commitment Energy Efficiency Scheme ("CRC")
The forthcoming CRC regulation will impact private equity houses with qualifying UK portfolio assets. The scheme will bring financial and administrative burdens as well as reputational risks from the publication of performance league tables. Its implications should be considered in purchase, holding periods and exit.
The issues
Sustainability should be considered at key stages of the lifecycle of a portfolio company to maximise value protection and creation. Considerations include:
On acquisition:
- Understanding the impact on markets and industries of sustainability mega-trends (e.g. climate change, demographics and water constraints).
- Compliance with regulatory and voluntary schemes (e.g. CRC Scheme, UN Principles for Responsible Investment).
- Understanding the sustainability-related risks and opportunities for the business's product life cycle.
On holding:
- Improving sustainability issue management to minimise risks/costs.
- Reporting internally to inform governance, and externally for transparency.
- Using sustainability-related issues to generate value.
On exit:
- Reflecting the value of sustainability programmes in the exit price.
- Evaluating and satisfying market and investor expectations of the company in relation to sustainability issue management.
How we can support you
PwC provides a full range of sustainability-related services to address these issues. Services include:
On acquisition:
- Evaluation of sustainability mega-trends, changing consumer behaviour, forthcoming regulation and government incentives.
- Advice on risk appetite, investment policies and procedures for managing company impacts.
- Sustainability due diligence.
- Deal sustainability risk screening guidelines and toolkits.
On holding:
- Review of the whole portfolio to identify focal points for action.
- Reviews and benchmarking of portfolio company operating practices and supply chains.
- Guidance on reporting internally and externally on sustainability.
- Guidance on achieving efficient regulatory compliance.
On exit:
- IPO and public company readiness assessment and action plans in relation to sustainability issues and standards.
- Valuing sustainability.
Case Study
CVC Capital Partners engaged PwC to better understand the extent to which sustainability issues present risks and opportunities for the value of its portfolio, and how it might focus limited resources on supporting the portfolio companies most in need of help in their efforts to manage sustainability impacts. In addition, the client was keen to understand the level of priority currently afforded to these issues by the management teams of portfolio companies and the extent to which they had taken action to manage risks and maximise opportunities.
PwC managed a survey of the portfolio companies that investigated attitudes to the sustainability agenda and actions to date. We then analysed the results and summarised them in a portfolio overview report and provided brief summaries covering each portfolio company individually.
