Unnoticed Opportunities for Private Equity

Tanja van der KnoopTBLI Asia, Bangkok, May 25th, 2007

Content

Introduction Developments in sustainability Influence from Financial Sector Link with Private Equity

PE key activities and Sustainability Fund raising Sector choices New investments Portfolio under management Divestments Divestments by write offs

Conclusions

Content

Introduction

PE key activities and Sustainability Fund raising Sector choices New investments Portfolio under management Divestments Divestments by write offs

Conclusions

Introduction Developments in sustainability Influence from Financial Sector Link with Private Equity

Developments in Sustainability

– Increasing expectations/pressure from stakeholders

– Sustainability has outgrown being an issue of ideologists alone, developing from niche / window dressing, into mainstream, driven by economic motives

– Sustainability issues have become more associated with financial performance and good corporate governance

– The Financial Sector is getting involved rapidly. They are integrating sustainability beyond risk management in their own processes as well as in requirements for 3rd parties

Financial Sector developments – unknown in PE

Equator PrinciplesDow Jones Sustainability Index

FTSE4Good Index Principles for Responsible

Investment (UNEP)

(EU, UN,OECD)International legislation

International Institutions

Financial Sector

ABN Amro Asset Management: “Companies that are well prepared will gain a competitive advantage.

The investors that are well informed will benefit.”

Pressure from the financial sector is growing …

Example ABNAMRO

ABN AMRO’s wake up call: 1998 Friends of the Earth/Milieudefensie campaign against ABN AMRO’s involvement in Freeport

“AA is committed to continuously improve the integration of sustainable development (SD) into its business processes.” Managing Board, December 2003

“AA is committed to continuously improve the integration of sustainable development (SD) into its business processes.” Managing Board, December 2003

Value Creation

LossAvoidance

ValueDestructio

n

Freeport

APP

Dialog with FOE

Forestry dialog

Mining policyO&G policy

Equator Principles

SD business strategy

Wake up call

Proactive Dialogue

PoliciesBusiness

Case

Level playing

field

Sustainability is mainstreaming Example ABN-AMRO

Courtesy ABN AMRO

The Financial Sector is getting involved rapidly

Other business

Projects

Largecorporations

PE

Financialsector

Government

NGO’s

Clients

Investors

Sustainabilitycriteria

Content

PE key activities and Sustainability Fund raising Sector choices New investments Portfolio under management Divestments Divestments by write offs

Conclusions

Introduction Developments in sustainability Influence from Financial Sector Link with Private Equity

PE key activities and Sustainability

New investments Company risks

and opportunities

Due diligence / sustainability issues

Portfolio under management Assessment of

opportunities andrisks

Divestments Sustainability

issuesinfluencing sales opportunities

Write offs Social and other

implications Influence on

fund reputation

Sector choices Identification of

interesting or risky industries

PEFund raising

Some examples of investment risks seen from a sustainability

perspective– Company investing in US company

no freedom of association– Dutch acquisition in US: substantial

gifts to Republican party– European companies forcedly

involved in Chinese government forced abortion practices within the plant

– Child labour not only very common in Asia (eg. building materials), Africa but also –officially allowed- in US agriculture – direct or indirect (2nd tier) links with company

– VC invested in sector under criticism. Initially already difficulty with co-investor. Problems with exit are due

Examples in textile production:– Chemicals used in crop growing

health/safety issues as well as environmental issues

– Bonded labour, child labour, freedom of association, general working conditions

– Fair trade issues

Some examples of investment opportunities seen from a sustainability perspective

•

Fund raising

• Risks– Large investors (e.g. pension

funds) are increasingly scrutinising investments

– Bad reputation will affect fund raising possibilities

• Opportunities– Sustainability Fund of funds

is increasing (number and available capital)

– Several market “niches” still undiscovered

Write offs

DivestmentsNew investments Portfolio under

managementSector choicesPE

fundraising

Pension funds that neglect sustainable investing, are acting outside their task: investing the pensions of their participants as safely as possible.

This is the conclusion of the international lawyers office Freshfields Bruckhaus Deringer. Freshfields was asked for advice by an international group of 38 pension funds and asset managers.

June 2006

Sector Choices

• Risks– Overlooking

• risky industry sectors• interesting industry

sectors• too much focus (and too

little added value) on the “known” sustainability sectors: renewable energy, clean tech etc. Parallels with IT 1990’s

• Opportunities– Base-of-pyramid

investment opportunities in low income economies

– Growing demand for sustainable products & services (macro-trend)

New investments Portfolio under managementSector choices

PEfund

raising

Sustainability will play an increasing role in successful investing in new sectors

Write offs

Divestments

New investments

• Risks– Overlooking company

(sustainability related) risks/opportunities

• Opportunities– Identify next generation

shareholder value– Challenge to spot the “new kids

on the block” (currently undervalued)

– Understanding developments related to Sustainability (legislation, supplier requirements etc.)

New investments

Portfolio under managementSector choices

PEfund

raising

Sustainability will play an increasing role in successful investing in new sectors /companies

Write offs

Divestments

Portfolio under management

• Risks– Companies often not aware

of sustainability issues/no focus item (Board/PE side)

• Non-compliance (upcoming) regulation

• Non-compliance (upcoming) supplier requirements

• Image problems (including for Fund)

• …

• Opportunities– First mover advantage – Value can be uncovered when

identifying social or environmental problem

• which could provide a differential in company / sector performance

• that is yet to be understood (priced) by the market

• in a way that relates to one of the company’s key business drivers

– PE may play important role in creating awareness and could drive implementation

New investments Portfolio under managementSector choices

PEfund

raising Write offs

Divestments

Write offs

Divestments

Divestments

• Risks– Attention in reps &

warranties paragraph of SPA

– PE (sustainability performance) itself might also come in limelight in this phase – giving strongly increasing demands of financial institutions

• Opportunities– Increase saleability by

ensuring that the company is “Sustainability compliant” (regardless of method of exit)

New investments Portfolio under managementSector choices

PEfund

raising

Write offs

Divestments

Write offs

• Risks– Parties involved save what

can be saved, quick & not subtle decision making

– Reputation risk for PE in case of irresponsible conduct/exit

• ethical dilemma’s• social issues• environmental issues

(industrial waste, soil contamination)

• Opportunities– …

New investments Portfolio under managementSector choices

PEfund

raising

Content

Introduction Developments in sustainability Influence from Financial Sector Link with Private Equity

PE key activities and Sustainability Fund raising Sector choices New investments Portfolio under management Divestments Divestments by write offs

Conclusions

Conclusions– The Financial Sector is moving to forefront of sustainability. This will shortly impact PE!– Until 2006 PE was relatively operating in the shadow but ...PE’s activities and methods

of operation are suddenly in the midst of attention. PE’s sustainability performance will soon be scrutinized

• environmental risk & opportunities in PE & VC investments (Yale)– Investments guidelines are also applicable for PE

• Equator Principles (initiative AA, HSBC, Barclays), 2002 • UNEP principles for responsible investment (PRI), 2006

– All PE activities are affected• several activities mainly face risks … but most also entail opportunities!

Opportunities can only be grasped by those who understand the developments

Contact details

• Tanja van der Knoop• +31 (6) 15 05 05 20• www,sustainableprivateequity.eu

• Tanja van der Knoop• +31 (6) 15 05 05 20• www,sustainableprivateequity.eu