When you think of private equity buyouts, sustainability doesn’t necessarily come to mind. After all, fund managers are looking to achieve positive returns for their investors first and foremost. But that doesn’t mean sustainability and conservation—or any explicit target of positive social and environmental impact—are excluded from private equity investors’ scope. Not every fund manager can raise a vehicle dedicated exclusively to impact investing, but all investors can keep some of those goals in mind, especially if their mandate includes particular target areas.
Take real estate-focused funds, where cutting costs often can be environmentally friendly. An investor might purchase an office property and replace aging light fixtures with longer-lasting bulbs, for example, or install smart energy consumption monitoring systems. It may take time to defray the upfront costs, but private equity investment is all about the long run anyway.
Real estate and infrastructure opportunities are obvious areas where well-established PE investment strategies and sustainable, environmentally friendly initiatives align. But they are hardly the only ones.
Not every fund manager can raise a vehicle dedicated exclusively to impact investing, but all investors can keep some of those goals in mind, especially if their mandate includes particular target areas.
One major area of opportunity for private equity funds with goals of promoting sustainability is recycling. The pros and cons are well-known; recycling is associated with recurring revenue streams as well as environmental liability. News stories have highlighted how Chinese recyclers are reducing their intake of recyclables from the United States, citing the lack of quality and the additional cleanup required for proper processing. By implementing technologies that can process even single-stream recyclables, a patient investor could address the growing need for domestic disposal companies.
Investments in recycling businesses also provide opportunities to integrate with existing portfolio companies. A PE investor might purchase a recycling facility to operate it as a supplier to a packaging company that’s already part of the firm’s portfolio, potentially leading to savings on disposal and other costs.
Another area of opportunity relates to the environmental regulation of modernized truck fleets and other sources of emissions. Staying in compliance with tighter laws will affect a broad subset of private equity portfolio companies, but moving swiftly to address those issues can represent a marketing opportunity.
PE funds can achieve a happy medium when it comes to focusing on financial gain while taking sustainability concerns into account. Nailing the right approach won’t necessarily come easily, but private equity firms can add goals of positive environmental and social impact without impacting ultimate returns.
This edition of “Midpoints by John Gabbert” originally appeared in the May/June 2018 issue of Middle Market Growth. Find it in the MMG archive.