ESG, digitisation provide tailwinds for higher value exits – report

Environmental, social and governance factors, digitisation and tax policies are among the leading drivers of higher deal valuation in exits, according to a report from EY.

Nearly three-quarters of respondents in the consultancy’s 2021 Global Private Equity Divestment Study, published Wednesday, say they expect to capture an “ESG premium” in businesses they are considering exiting.

Social impact policy, including diversity and equality commitments, was the area of greatest focus, followed by finding buyers with an ESG focus, brand management and climate change commitments.

The value attributed to ESG qualities is evolving, Pete Witte, global private equity lead analyst at EY told affiliate title Private Equity International.

“GPs are creating value in their companies via ESG initiatives and expect to capture some of that premium on the sale.”

PE firms that have been focused on traditional measures of value creation such as revenue growth and EBITDA growth have now begun pulling some of these “non-traditional levers” which includes ESG, Witte noted.

“When you are in an environment like we are in right now – where valuations are very high – you really have to execute to perfection on all of these traditional measures of value creation and have additional levers like ESG in place,” he said.

PE exits climbed 40 percent to almost $600 billion in the 12 months to March, compared with $426.7 billion in exits the prior year, according to data from Dealogic – a positive outcome in a year of pandemic-induced lockdowns and market shutdown delaying planned divestments.

Along with factoring ESG into exits, firms have also zeroed in on digitisation as an important divestment thesis. Over the next 18 to 24 months, more than half of PE firms believe artificial intelligence will be an important value lever for their portfolio companies, in improving automation, and for forecasting and decision-making that directly impact margin enhancement and cash conversion, the report found.

Tax is also a growing focus for PE firms. Given the political climate in the US around expected tax increases, 65 percent of PE firms expect changes in tax policy to impact the timing of their exits. Among potential tax items, transfer pricing exposures and the challenges in repatriating cash proceeds were the biggest concerns.

EY gathered responses from 106 global PE executives in the Americas, EMEA and Asia-Pacific between February and March. More than two-thirds of respondents’ firms have at least $30 billion in assets under management.