21 Sep Private equity firms increasingly investing in social impact
Even the staunchest defenders of Wall Street or the City of London will admit that the private equity industry, rightly or wrongly, has developed something of a bad rep in the past couple of decades.
In the popular imagination, venture capitalists are all sharp-suited “greed is good” spouting Gordon Gekko-types, buying distressed businesses or household brands before stripping them bare and slashing employees to turn a quick buck.
But all this antipathy towards private equity however distracts from its rather sober, utilitarian aims: to turn a flagging enterprise into a flagship of success. Private equity is meant to inject working capital into a promising business and refine products, operations or management, while keeping shareholders suitably compensated for their risk taking.
According to David Hutchison, former head of UK investment banking at Dresdner Kleinwort and chief executive of Social Finance, a non-profit set up to improve third sector access to private financing, there is “considerable mileage” in bringing investment disciplines to bear on socially minded organisations, “particularly a focus on performance management and a sense of accountability for delivery.”
Yet until recently, where firms have attempted to invest in positive social or environmental impacts, the motivation has been more about corporate responsibility than business strategy. Social impact has been merely “an attractive by-product”, explains Hutchison. “What you need to find is capital that values the social impact being delivered and doesn’t just tolerate it. [This] is more than an extension of philanthropy.”
Breaking the mould
One private equity firm seeking to break the mould is London-based Bridges Ventures, which in June 2012 was crowned sustainable investor of the year by the FT and the International Finance Corporation. With a portfolio that includes environmentally friendly care homes, affordable gyms in deprived urban areas and even a charity-run social enterprise for vulnerable teens, Bridges Ventures takes a “fundamentally different approach to most other investors” says co-founder Michele Giddens.
“We are a part of private equity that is consciously asking: how can we place money for positive impacts?” The firm’s first criterion is whether a venture will have a positive social or environmental impact. Ensuring it is commercially viable comes next. The model is “investment plus an engaged relationship”, Giddens says. “Two things should happen if we have got it right. One is that they achieve more positive impacts, and the other is that [the enterprise will] grow in value, and therefore the investors make an attractive return.”
Ten years after it was founded, Bridges Ventures now has nearly £275m in funds under management and its backers include major private equity players such as 3i, Apax Partners and Doughty Hanson. This is evidence, says Giddens, that the industry recognises that there need be no “trade-off between financial return and impact”.