Hydra partner Sam Barton’s commentary published in leading private equity magazine The Drawdown

the Drawdown logo.jpg

Communications in private equity: a responsible approach

Private equity is no stranger to reputational issues. So it was no surprise that when the
latest PE-backed retail downfall emerged at the end of the summer in the form of the US
operations of Toys R Us, many pointed the finger at its financial owners.

What is more surprising, however, is that private equity as a whole has hit the headlines for
the wrong reasons far less in recent years than it became used to in those temperate pre-
crisis years of a decade ago.

This is no accident. In Europe, once-feared legislative developments, instead of causing the
industry undue administrative upheaval, have in fact acted to bring private equity into the
financial mainstream, and the public eye.

At the same time, the work of industry bodies such as Invest Europe – through lobbying
efforts, the development of rigorous professional standards and a drive to educate the
wider public about the benefits of private equity – has created a secure foundation from
which GPs can operate without fear of being misidentified as financial predators.

Even Germany – where buyout houses were once shunned as “locusts” – has seen an about
face, and the country’s venerated Mittelstand companies now largely see financial investors
as strategically minded, deep-pocketed partners. Private equity activity there is set to reach
a record high in 2017.

As with any industry, however, the landscape evolves and expectations change – and now is
no time to rest on any hard-won laurels.

Unless you’ve been sitting under a rock for these past few years, as a GP you will be aware
of the next major reputational development facing the industry: environmental, social and
governance (ESG) factors. Seeking to be at the forefront of ESG is a more attractive
challenge than repairing a tarnished reputation, but it is no less important.

According to Intertrust, almost 80% of private equity investors expect GPs to increase their
focus on managing ESG considerations in their portfolios over the next two years. And this is
not driven solely by an idealistic desire to do good – there are financial implications as well.
Research by RBC Global Asset Management found that 77% of European institutional
investors think ESG policies mitigate risk, while more than half of them believe they add
financial value. 75% of respondents to a PwC survey on M&A, meanwhile, stated that poor
performance on ESG factors had prevented a deal from going through.

With numbers like these likely to move further in favour of responsible investment in future,
the requirement for robust and comprehensive ESG policies and reporting procedures will
only rise further. So how should GPs react?