Ethical Behaviours & Sustainability in Private Equity Lead to Better Outcomes

By Helen Steers, Manager, Pantheon International Plc.

Recent global events have shone a spotlight on the ethical behaviours and sustainability of businesses around the world. Pantheon places great importance on these qualities in its investment selection and ongoing portfolio monitoring, and indications are that those companies that had placed such matters high on the agenda were better prepared than most to respond to the COVID-19 crisis. We have been managing and advising Pantheon International Plc (“PIP”) – the publicly quoted FTSE 250 private equity vehicle – since it was formed over 33 years ago in 1987, and Environmental, Social and Governance (“ESG”) evaluation is an integral part of the entire investment assessment and due diligence process when assessing the suitability of deals for PIP’s portfolio.

The global spotlight is also shining brightly on diversity and inclusion. This matters to us too and is an issue that we seek to ensure is continuously on our private equity managers’ agendas. We believe that taking into account the needs of a wide range of stakeholders provides for better employee, community and customer engagement, leading to more robust decision-making and better sustainable financial performance over the long term.

In 2007, as one of the first private equity signatories to the United Nations-supported Principles for Responsible Investment (PRI), Pantheon was an early adopter of the six principles which form part of this established global framework and, in 2020, was awarded an A+ by the PRI for private equity.

The six Principles for Responsible Investment underpin our ESG strategy
1. Incorporate ESG issues into our investment analysis and decision-making processes.
2. Be active owners and incorporate ESG issues into our ownership policies and practices.
3. Seek appropriate disclosure on ESG issues by the entities in which we invest.
4. Promote acceptance and implementation of the Principles within the investment industry.
5. Work together to enhance our effectiveness in implementing the Principles.
6. Report on our activities and progress towards implementing the Principles.

Pantheon actively engages on ESG matters with the private equity managers that we back through our participation on advisory boards – we sit on over 470 globally as at 31 December 2020 – and through the regular portfolio monitoring meetings that we hold with those managers.

Our responsibility and influence extend far beyond the point of investment, and so we undertake active ongoing portfolio monitoring after an investment is made. One of the ways we do this is through RepRisk, a third-party news information service that has been fully integrated into Pantheon’s monitoring processes since 2017. This highly effective tool delivers excellent coverage on material issues affecting underlying portfolio companies, allowing Pantheon to find out how the relevant manager plans to address the issue or what steps might already have been taken. Often Pantheon is the only investor of this type to have contacted the private equity manager in this way.

As part of our commitment to improving diversity and inclusion in employee culture, we have incorporated a diversity and inclusion section into our due diligence questionnaire for all primary investments and we look to ensure that the issue of diversity is continuously on the private equity managers’ agendas. We believe that this is not only ethical but our strong belief is that more diverse private equity firms make better investment decisions. In an increasingly competitive world, underlying managers are frequently pitching to management teams that have a choice of whom they work with. Private equity managers need to be able to relate to a more broadly diversified set of professionals in the C-suite in portfolio companies and therefore need to field a diverse group of investment professionals.

And we practise what we preach within our own business too. Three of the seven Directors on PIP’s Board are female and we believe that Pantheon was the first private equity firm to publish its gender diversity data. As at January 2020, 40% of our own overall workforce and 45% of our investment team heads were women. In addition, 39% of our overall workforce were from non-white ethnic backgrounds.

As a socially responsible investor, Pantheon quickly recognised that a credible response to the Covid-19 crisis was necessary and, as a result, increased its regular dialogue with the underlying managers. We are acutely aware that the private equity sector will be judged not only on performance through and after the crisis, but also on the wider impact of the underlying companies during this challenging time. We have been impressed by the swift actions taken by our private equity managers. Notably, how they ensured that their portfolio companies were prepared for a potential downturn; how they prioritised employee health and safety, facilitating a smooth transition to working from home where possible, and how they stepped up oversight of their portfolio companies, in some cases, focusing on their survival.

Equally, it was reassuring to see so many of the underlying companies in PIP’s portfolio not only successfully managing their own internal challenges brought about by the crisis over recent months, but that they were also able to look externally and offer their resources and capital to provide support to local health services and their workers as well as vulnerable groups and charities.

In many cases, the involvement of our private equity managers and their portfolio companies in the relief effort, and their active contributions towards seeking solutions to alleviate the impact of the crisis, have been directly through their operating activities such as:
• Biotechnology companies contributing to the development and trials of a vaccine for the virus;
• Healthcare businesses manufacturing essential equipment or providing care;
• Industrial companies retooling to produce disinfectants, hand sanitisers and other hygiene products; and
• Information technology companies providing software to improve the efficiency of the healthcare system through better scheduling, remote care provision and support services.

In other cases, our portfolio companies have contributed indirectly by donating services and equipment to hospitals and key workers. Many of our private equity managers themselves have donated tens of millions of dollars to support local communities and the families of portfolio companies.

As we look towards the future, there will undoubtedly be a different focus on many aspects of life, such as new working patterns, an emphasis on health and wellbeing, and a reduction in environmental impacts as a result of changing travel habits, not to mention the challenges of living with the economic aftermath. Private equity managers have an enlarged opportunity to use their knowledge, experience and networks to help companies to not only build value but to also bring long-lasting benefits to societies around the world.

A strong ESG proposition can have a material impact on value creation in private equity, and the effective mitigation of ESG risks strengthens downside protection and enhances a company’s reputation. Ultimately our view is that doing the right thing leads to better long-term performance. Like many people around the world, private equity managers have been touched on a personal level by the pandemic and we expect – and welcome – that much of the increased responsible investment effort will continue in the post COVID-19 world.