A year ago, in a conversation with Private Equity International, I addressed a difficult question: while private equity firms can credibly claim to outperform other ownership models when it comes to financial returns and job creation, can we claim to be better at engaging with employees? My answer, regrettably, was no.
The discussion with PEI was centred on private equity’s so-called “social license to operate”. I went on to argue that unless there was increased evidence within wider society that employees felt positive about private equity ownership, it would one day pose constraints not only on the growth of the asset class, but also on our ability to deliver returns to investors and our long-term sustainability as an industry.
Sustainability is a topic that is much on our minds at Partners Group; in fact, we describe our purpose as generating “sustainable returns”. The phrase succinctly articulates our fiduciary duty as a private equity firm, which is to consistently and reliably generate superior financial returns for our investors. But it also expresses a secondary goal, which is to accomplish this in a way which creates lasting, positive impact for all stakeholders.
This does not require a radical rethink of approach. The entrepreneurial governance employed by value-adding private equity firms to drive the transformation of companies, generating growth and, ultimately, returns for investors, is the mechanism that creates stakeholder value. A strong focus on environmental, social and governance factors goes hand–in–hand with this and has become an established part of the private equity playbook for creating returns. At Partners Group, for example, we are able to report to our clients every year that our action-oriented, entrepreneurial governance has created tens of thousands of new jobs; avoided millions of metric tonnes of carbon emissions; and significantly reduced waste and electricity use; in addition to driving financial performance.
“We have arguably not fully considered the lasting value we create for another group – the nearly 200,000 employees who work across our portfolio companies”
However, as an industry, we require a more inclusive definition of the stakeholder group for whom we aim to create lasting, positive impact. The groups that share the majority of the financial value created by private equity are investors and their beneficiaries, management teams, and GPs. And while in the case of Partners Group we estimate client beneficiaries to account for around 200 million workers worldwide saving for their retirement, we have arguably not fully considered the lasting value we create for another group – the nearly 200,000 employees who work across our portfolio companies.
That this has been an industry-wide blind spot can be seen in the negative headlines that have dogged our asset class since its inception; also, more recently, in the debate around whether private equity-owned companies should be entitled to government support during the pandemic. It is my belief that the majority of private markets firms set out to be good corporate citizens, but the portrayal in much of the media is of shadowy organisations run by ruthless people motivated only by greed. Worse still, as a result of this, many employees are fearful of private equity ownership.
One shift that is therefore required to ensure the long-term sustainability of our industry is the systematic consideration of a broader group of stakeholders in the equation for sustainable returns, and, in particular, portfolio company employees. When I spoke to PEI last year, the pandemic was at an early stage and we had no idea of the global health crisis that was about to unfold. A year later, with the economic legacy of covid-19 still uncertain, the argument for private equity to make this shift is more pertinent than ever.
At Partners Group, following extended discussions with our largest LPs throughout 2020, we are piloting re-investment into initiatives that further the professional, personal and financial growth of portfolio company employees. In our view, this will create a virtuous circle, ultimately building better, more sustainable businesses, which will not only attract committed employees for the long term, but also command a higher valuation in the market. Over time, we believe this approach will contribute to cementing private equity’s place as the ownership model of choice, for employees as well as investors.
Steffen Meister is partner and executive chairman of the board at Partners Group