HERMAN MARAIS: Private equity is a key driver of sustainability revolution

Climate change action and issues around sustainability will continue to feature prevalently within the public discourse ahead of COP27 in November. These important issues form part of a broader discussion around constructive and sustainable socioeconomic development for the sake of the planet and its people.

It is therefore incumbent on all global stakeholders and heads of industry to consider their role in contributing to these global imperatives. For all players within the broader investment sector, now is the time to take small but consistent actions that will make a considerable impact as a collective.

For decades private equity struggled to move beyond its boxed appeal as a "niche asset class". But, in a short space of time, propelled by the growth spurt triggered by the pandemic, private equity has earned its place among mainstream bastions of the investment industry.

The New York Times recently referred to private equity firms as the “new financial supermarkets”, referencing the sector’s increasing influence on an expanding cross-section of industries from music and consumer goods to healthcare.

Recent reports by McKinsey & Co reflected industry growth of over 5%, with money managed in private markets reaching $7.4-trillion by the beginning of 2021. A number of other findings support the prevailing opinion that private equity has grown to become a major player in the global economy.

This is also true of its market presence in SA, where evidence of an industry rebound, driven by rising investor interest from international shores, paints a promising picture. In fact, the prospects of the private equity industry are crucial to the recovery of the post-pandemic economy, particularly in developing countries where the sector has made and continues to make a significant contribution to job creation.

As industry role players, stakeholders and decision-makers at the forefront of the next evolutionary step for private equity, the most pressing question is: “How should we leverage this newfound influence and market share to drive sustainable growth and promote positive change within the broader business community?”

The answer lies in the foregrounding of environmental, social & governance (ESG) objectives and impact. The evolving economic climate presents private equity firms with an unprecedented opportunity to move beyond compliance and towards value creation. In a sense, this important and much-needed shift represents the move from short-termism in private equity, to bigger-picture thinking.

The appetite for ESG and impact investing is there, with institutional investors taking the lead. It is now critical for private equity firms to meet this upsurge in investor interest with a push to use strong governance and board representation to show investees how to thrive in an economy that puts sustainability first.

Best practice

ESG and positive impact have taken centre stage for Exeo, as an operational imperative rather than an add-on to appease investors and stakeholders. This has materialised in a set of closely monitored and measured best practices.

For this reason our management team embeds ESG and impact considerations and criteria firmly in our investment screening, evaluation, and decision-making frameworks and processes. Another best practice is to provide extensive training and resources, such as template policies and procedures to support investees in meeting compliance and reporting requirements.

For sustainability head Tisha Greyling, having an environmental and social management system is a non-negotiable. It is a vital means by which companies can systematically manage environmental and social risks, as well as measure impact over time.

Within investee companies the roles related to inculcating an operational culture built on ESG and sustainable development should be assigned to a senior post with as much decision-making sway as other top executives.

These are a few of the best practices private equity firms can lean on as a foundation for creating value, by tapping into the emerging needs and demands of the investor landscape and society at large.

This approach has proved wholly successful in helping our investee companies build resilient, future-proof businesses, as was reflected in the results of the most recent report on our Agri-Vie Fund II, whose nine portfolio companies employ just under 9,000 people in Sub-Saharan Africa.

The total number of jobs created on average between 2018 and 2021 grew by 17.5%, with the majority of workers coming from rural or low-income urban areas. Using a conservative multiplier of five people per household benefiting from one person’s income, this amounts to about 60,000 people being supported as a result of fund investments.

This is merely one impact metric measured in the report and a key example of the ripple effect of a solid ESG business ethic being nurtured and fostered within the world’s most promising companies.

Now, as we prepare to enter the fundraising phase for our third fund, Exeo Fund III, these principles and best practices have laid the groundwork for building an even more progressively minded and ESG-driven group of investees, who together will make a pivotal contribution to our national and regional economic future.

• Marais is managing partner at Exeo Capital.