Hello and welcome to a new episode of Private Equity talk.
I'm Real Deals. Reporter, Jennifer forest.
And in this episode of our podcast will be discussing
everything about the Competitive Edge.
That our focus on improving, sustainable practice within a
portfolio company can do for returned at the point of exit.
I'm joined by Beth, Halton partner and head of impact, fund
at Palatine 5X. Petit and Eric of Monson partner
at Verde. Hello Tebow Eric.
I thought it would be a great place for you to start.
If you maybe talk us through what areas of sustainable
practice and most often embedded into a value creation strategy
within your firm yet. How are you sure?
So I mean being a growth private Equity Firm, you know in Nordic
such Germany and UK, you know, we we like to think of of the
north here as Nordic laboratory of the intersection of new
technology and sustainability and sort of thinking that you
know we have governments and consumers and businesses really
being at the Forefront of those all those megatrends.
So we we try to throw think that you know when you're there and
you feel the pain points of new technologies bring brought to
bear. That's, that's great because we
find a lot of companies trying to solve those problems and
specifically we're trying to to then invest in through the
energy. Energy transition team.
Resilient communities theme sustainable consumption theme
where we're finding are a lot of companies that you know our new
and best. Did you want to talk with her as
well to sort of sustainable areas that being important by
Palatine within value creation? Yeah I mean Simon ESG
perspective we take quite a holistic view of sustainability
sustainability and value creation at Palatine, are we?
Bostick spill, a framework of ESG which covers to
environmental pillars, three social and then the governance
pillow as well and we assess that across all of our portfolio
companies pre deal and then post deal when we've done the
investment as well. I think we look at materiality
as well. So really important for us is
that when we invest in companies, will looking at the
material ESG issues, whether that be environmental or social,
and we'll prioritize, Sighs those issues initially but we
try and help companies across all of our six pillars of ESG
and better within those sort of investment practices and
investment theme. How do you plan for those during
the holding period? How do you sort of plan for
sustainable practice and the improvements that you're going
to make to the business? Yeah, so ESG is embedded into
our value creation approach. So I should say, Palestines been
looking at yesterday for 12 years now.
And certainly initially, it was more about risk, mitigation and
understanding businesses. As we've evolved a tsg practices
over that time, we started to we embed ESG within value creation.
So is part of, when we start to look at an investment company,
we started Talk about it right at the very start.
So, the first time we meet the management teams will start to
talk about ESG and value creation.
Alongside each of them, we will then develop our strategy on on
value creation and and ESG a lot alongside the management team as
we go through the exclusivity process and then post deal, we
have a baseline review on res. Gee that looks at across all of
our six pillars will look at At the performance of the business
today and then also, the opportunities that we feel the
business has going forwards as well.
And we'll do that in quite an in-depth report, on ESG, without
without management teams there. And then we wanted to identify
those opportunities. We feel we've got across across
our six pillars, well, then embed that within the value,
creation plan, and the value creation process for management
teams as well. And Eric, did you want to talk
us through? How Yes, be considered within
the 100-day plan when you invest in a portfolio company and how
are achievable goals set out at the beginning of the whole
interior? Yeah.
No, absolutely. I think let me, let me, let me
just start by saying that, you know, I was an operator for 10
years before becoming a partner in the game.
So I was the CEO of the second largest recycling company in the
nordics and, you know, we had to work which is the inability as a
Core competitive liver within that company for, you know, the
past 10 years. And so it brought this company
to the 11 you know, most reputable place in Norway, you
know, it doubled, the margins of that business.
So I've seen sort of firsthand the power of sustainability, how
that can, you know, unleash all this energy in a company and to
also know the employees and the customers and suppliers and so
forth. Right, so so so, you know, I
don't take this as a sort of about top-down approach.
I think about it as a book. Approach where we old already in
the investment phase? We identify not it's not the
tick, the boxes type of thing you identify where lies the
biggest opportunity for this company to really sort of move
the needle, agon sustainability. And then we make sure that we
agree with the management, answer the other co-owners that
this is in reality where we can make the best impact.
And then we bring that forward into the 100 day program as you
asked for, you know, because then we have already decided,
where do we want to sort of? Create this impact and how
should we, how should we measure it specifically, how should we
scale it? What type of budget should we
create for it? What type of action should be
10? Take to our partners in the
value chain? How should we incentivize it and
so forth? So it's all a part of a just
like that said, this is it's from from, you know, all the way
from the get-go and until sort of the exit process if you will
and on that topic management. How do you how do management
teams? Take to sustainable improvements
being made within their business?
Was it something? They're really Keen for or is it
something where you have kind of experience some sort of
resistance? No, I think those days are over
many years ago, at least, this year.
I mean the yeah, I think I would fit the that question around
saying it will be very, very difficult engagement routines,
unless you have this stance. And so, so I think that, you
know, this is It's in, it's gone to a point where, you know, we
gauge intentionality and whether the intentionality of the impact
is true. It's not, you know, something
that's just on pastry or the representation.
But, you know, it's something that has been already discussed
with all layers or doing Sation with their customers suppliers
part of the sales dialogue. And so, I think it's in all
these dialogues. It's taken us.
A very, very positive thing that we are on the same page on this
and it's a key part of the value creation Libra for that for
those companies. Bethany thing the same sort of
thing with Palatine. Yeah, I think so.
I think so, I think it has changed though.
So certainly, when we first started talk about ESG 12 years
ago, there was more resistance from management teams.
You know, it was a New Concept particularly Palatine because
we're investing in the lower mid Market, it was a New Concept for
many people and, you know, it did take a bit of effort to
convince management teams to Take some of the initiatives on
and take them seriously. And and those days we use case
that is a lot. So you know, we explain to
management teams via case that is the benefits that ESG could
bring to their organization. But as are excited, you know,
it's changed dramatically in the last 45 years.
But even more in the last 18 months, and now, you know,
management teams are coming towards saying, you know, at the
first meeting saying, you know, we really like power time
because of their ESG stands, and how can you help us?
And we're seeing the loans of Engagement for management teams
now. And I think that's what's
interesting about the part of the market that we invested, I
think there's a lot of management teams that are really
wanting to do the right thing, but maybe they don't have the
resources internally, or they don't have the knowledge to do
that. And I think that's where private
Equity houses that are taken a leading stance on ESG, can
really help management teams as well and we can support them
through that process. That Palatine.
We have to in-house sustainability experts, as well.
So we can bring bring resource to the table to help those
management teams on their Journey that maybe they don't
have internally in their own organizations.
If it's something that sort of gives you the edge during an
auction process, and if it becomes more competitive, is it?
Something you kind of use as leverage as putting the ESG into
the value creation process? Yeah, definitely.
I mean with our stance on on ESG and you know, Palestine is now
we went through a rebranding to more line, our branding as well
with what we do. So you know our branding is now
positive Equity so we put it front and center in terms of
when we're speaking to management teams and I certainly
think you know because we've got that that backlog of examples
and case it is what we've done on ESG.
We can we can talk to management teams about that and it
certainly does give us an advantage at the moment.
However, However, I do think, you know, asg's top of the
agenda for the most private Equity house at the moment.
So I think a lot of people are now putting a lot of resource.
And, you know, I've seen in the private Equity industry on
LinkedIn. You know, lots of people hiring
their own internal ESG people as well.
So, yeah, and that's what we wanted to know at Palatine.
We've been really proactive in promoting ESG in the industry.
We've been doing that for many years now.
So, you know, it's great to see The the the industry as a whole
is now really embracing the issue as well.
And then with both, you guys will want to look at much
further down, the holding period as your about, looking to exit a
business, looking at the sort of financial returns of the sale.
Do you think that adding this, that kind of sustainable Edge
during the valuation for five years?
Prior can be used to leverage a higher price?
And have you had any experience of this happening?
Eric you maybe want to start? Yeah, no.
I mean, I'm in first of all, I mean, you You see that in
scientific analysis, I just read the report by PCA all term
saying that there's a on average of 15%, DSG premium, you know,
all multiples. So I think that's, you know, you
see that reported I've seen that in the sale of sort era seen
that in the sale of your own my own business, but I think it's
a, it's a two-fold thing. I think, what we do is that we
really we believe in the moral obligation and we like sort of
the marketing Ploy of it. But we really going after 4:00
The Competitive Edge of doing this, right?
And with the Competitive Edge I've seen, you know businesses
will be, you know, five times the ebitda based on moving this
dialogue away from a price. Only public tender Market into
Autumn partnership oriented sustainability dialogue and like
so. So I've seen that type of effort
on the ebitda level and when you get to the the multiple
expansion as well based on growth and and ESG.
Then that is a very that's a very potent mix.
And I think, I think you see that, you know, we try to be, we
have an in-house developed approach for how we gauge.
Whether something is impactful or not, right answer, we tried
to use that on our, our history, you know, of of Investments.
And we have, you know, several hundred investment investment
companies that were, you know, that we've had.
If you only look at the ones that we've exited what you see
is that the ones that are scoring, you know, highly on it.
Impact versus the others. It's a three point seven times
multiple on on the rest and as six point three more times
multiple or money on these g1's. So I mean that that both numbers
are really high but it's considered six point three
times. That's that's amazing.
That's definitely a massive sort of leap up in the mold of whole
Beth. Did you have anything to add?
Because I understand that Paulo times recently, published a
report on these on these return. Yeah, and so we just did an
exercise. So, we've been collected, we
have this six full of Frameworks that I've mentioned before and
we do a numerical scoring across the six pillars for each of the
businesses that we invest in. We update that numerical scoring
on an annual basis, and then exit, we obviously update it for
the exit and honor for us to do the ESG exit review, and we have
just gone through a process of mapping that to Returns on the
business as well. And we went into it with an
open. In mind to say, okay, let's see
if there's a link between companies that score really well
on the ESG and companies that give the battery turns and we
found a really strong correlation across those two
metrics. And you know, not only companies
that score better on ESG deliver better returns, but also
companies that improved the most as well.
I'm ESG were the highest returns for Palatine as well.
So there's a really strong correlation there now.
Little bit difficult to do a cause and effect.
So it might be that the best management teams Embrace, ESG
more and therefore, the best management teams all of you the
best returns as well. It might be that there's a
particular pillar in the issue that really moves the needle.
So we have a people pillar. Is it that pillar?
That's really moving the needle on return.
So I think there's a lot more analysis and we are expanding
out that analysis now at the moment and we'll hope to deliver
a much more comprehensive report, but there's certainly
Um, the evidence that we've seen internally within Palatine, a
very strong correlation between ESG performance and and Returns
on those companies, I guess that whenever we talk about returns
and ESU performance, we have talked about the lp.
Do you find that impact of ESG? On returns is something you're
having to pick up more and more with LP's.
We've sort of discuss asleep in the return money multiple jor-el
Pisa, absolutely love That Eric didn't want to steal the spray
your conversation. Yeah, sure.
I mean, I mean only going back to 2017, I remember sitting in
the hotel room in Boston, striking out the word impact
because impact, in some people's view were, you know, lower
returns. And I think that that, that that
is not the case. Any longer ended up with
discussions, we are having with our LPS, you know, they, we have
the same returns and impact and in fact, we actually believe you
in high returns that's I just alluded to in the, you know, in
the morning, multiple said previously, right?
So, so I think this is very well and I think that it's a key part
of any discussion with our LPS at the moment and they're very,
very interested in this work. And I think that also, you know,
we are trying to move the needle on how to do impact Investments,
and I think that, you know, we have, to be honest.
We, I mean, we don't know how we have trying to just learn from
the best. We try to take the two to expand
by our own knowledge, but then to be very, very old Open with
others. You know, not now hopefully with
bats and the and with our LPS to have an open book on how we do
it so we can learn from each other and to really sort of
again, move the needle even further on impact Investments.
I think that's a, an approach that the LPS, like they want the
returns. They want to have the impact on
the world and they want to part of moving this industry forward.
And Beth, did you have anything to add on this LP?
Now, just agree. Totally agree.
I think we're back in 2017 impact slightly different from
ESG so we should say it Palatine.
See is g is how a company delivers its goods and services.
We see impact more about what company does as its core
business. So but certainly back in 2000
and I think well I think ambassadors of always got that
ESG, I think it's been difficult to link that at to returns and I
think now we're getting enough stats to link those two returns.
I think that's really great. I think investors have always
been really positive on ESG and I've always, you know, being
very positive on what we do on yesterday for sure.
And as always seen as a benefit I suppose what they haven't
necessarily. What they are starting to do now
is insisting and not only insisting that that that private
Equity houses have a policy but insisting that private equity
She's actually Implement that policy and there's evidence that
that policy is being implemented and what are the outcomes from
from that as well. So I think that's really moved
on and I think you know, obviously investors have always
been positive Aeneas to but now the sign to say, right, okay?
What is the evidence that you are implementing this across
your portfolio on the impact side?
You know, back in 2017 as Eric Seidel, we were having to do a
lot of convincing that you could generate private Equity returns
from an impact strategy. And we spent a lot of Of time
talking about that with with with our peas.
And you know, I think we spend less time talking about that
now. I think that link between impact
and returns is there you know with you know there's some great
examples now of exits within impact funds and so I think
investors are getting that concept now as well.
Yeah and I would just like to just add to that that I mean I
love the fact that our latest found that actually has an
impact carry so it's an impact carry element.
Where you know we did the impetus is on us to prove that
we are actually having input impacts and so so and that you
know that that goes down even to our you know, private Equity
conversations. I think that's, that's beautiful
because then the new world on the same page trying to do the
right thing. I think Do you think this idea
of impact carry something more and more private Equity firms
are going to be taking up in the not too distant future, I think
so. And I think it's going to be
bigger but, you know, I will see you, but I, but I, but I hope so
because I think it keeps everybody honest.
Sure sure and where I don't want to finish this conversation
around returns and esj is around lessons, is you mentioned
earlier, Eric about how nice it is that we can sort of learn
from one another with with this especially with the LPS and for
any of our private Equity friends listening, what is one
sort of less than you think. They could learn about how to
improve The Return by improving the sustainability.
Payable methodology within a portfolio company.
Eric, you want to go back? Yes sir.
So so so I'll go back to where I started in the in.
You know you have to think about the the return of the firm and
you know my old firm, we were the fifth largest Transportation
provider here in the nordics and so everyone had the idea that
would impact your sustainability, but must come
from Battery vehicles, that that would be hugely sustainable, you
know, on an environmental side But, you know, we had, we had
this thought that look, that's right, we have to do that and we
cannot be a laggard, in terms of electrifying our Fleet, but
that's not, that's not a sustainable competitive
Advantage, because, you know, we can, we cannot buy better
vehicles from skarner or well will than anybody else.
So, this is a hygiene factor and not the Competitive Edge.
So what we can do in that firm was to look at the materials
that's really difficult to materials knowledge.
The new technology to create better Morse recycled materials.
That we can be different on it will hugely impactful, it will
be something that we can differentiate them.
And so the point of this whole story is that I think that you
have to spend time on, you'll not ticking the boxes, not
taking sort of the obvious things.
But to figure out, you know what, on one hand really matters
and at the same time, really differentiate you.
And when you, when you spend time, trying to figure out those
old to do things in parallel, then I think that can have huge
impact on the returns as well as, as your impact.
Any final thoughts? Well, I think we've learned a
lot over the years and I always say, yes, G is a journey, not a
destination. So we are learning all the time.
So you know, you never sit and think I'm gonna ask you, you
never are there so many more things that you can be doing and
it involves and that's what makes it.
A really, really exciting industry as well.
To be to be a part of because it's content continually
evolving. I think, you know, some people
can get a bit overwhelmed by ESG, you know, if you're trying
to start now and there's lots of Regulation coming in and it can
be a little bit overwhelming, I think.
And so I usually say to people just start somewhere, I think it
can paralyze people from actually just starting doing
anything with only introduced. Oh, you know, just, just just if
you start along your process, you know, start point in time
but then have a commitment to get better every year.
So you can't go from nought to 60 in in, you know, Straight
away. It's taken Palatine 12 years to
get to where we are today. And so I would say start
somewhere. I have that commitment to get
better every year and understand that it is a journey, not a
destination. Janna and I was just to sort of
sum it up my butt. I think our favorite sgg is
number 17 cooperation and I think that's what's going to
take to to move it. Move this here now.
So me and I'll just like to take the opportunity to say, look at
anyone who's struggling with it or that one to sort of cooperate
share ideas. You know, figure out how to go
to from nought to 60, you know, reach out.
And you know, we are available. I'd love to be to be able to
discuss these ideas with anyone on the corporate level or on LP
level or other DPS. So just reach out.
Yeah, now we just published our ESG Journey over the last sort
of ten years report as well, which has got lots of, really
great tips and hints and, and details.
What we've done is Geo over that time.
So that's I think that's a good place to have a look.
If you want to get some ideas for sure, amazing.
What a great note to finish on Seth.
Eric, thank you so much for taking the time to talk to me
through this. It's definitely a really
interesting. In one.