Private equity-owned companies are more socially sustainable than their listed peers, and their private equity owners may be the driving force behind social improvements, the ESG Data Convergence Initiative’s 2023 results suggest.
The Boston Consulting Group, appointed by the EDCI to collate and analyse the data submitted by its members and produce its benchmarks, has released a report assessing the 62,000 data points submitted by fund managers this year.
The significance of this report should not be underestimated: it provides some of the earliest quantitative, statistical evidence we have of how effective ESG initiatives are, how they correlate with material value and how they compare to other markets, specifically within private equity portfolios. There is now some evidence to support the oft-heard adage that the private equity ownership model provides more latitude for investors to make assets more sustainable.
“There are lots of anecdotes and case studies about sustainability in private markets. But what really excites me is that this is the first time we have such a comprehensive data set and can really drill into those, to complement case studies with hard insights from data,” BCG partner Ben Morley, who leads the EDCI consulting team and co-authored the report, tells New Private Markets.
On several social KPIs, PE-backed companies outperform listed companies of comparable size, BCG found. “We took equivalent data points from stock exchanges around the world,” says Morley. “We tried to make it as comparable as possible – for example, we excluded companies that were larger or had revenues of over $2 billion because private markets companies skew smaller.”
PE-backed companies created four more jobs per 100 full-time-equivalent employees in 2022 than public companies. On average, PE-backed companies employed nine new FTEs net of attrition in 2022, while their listed counterparts employed five, says Morley. “We found that statistic fascinating. We cut that data by industry, by geography and by size of company and it remained consistently true.”
“The stereotype of private markets” – that private equity cuts jobs to reduce costs – “is actually not true by the data,” says Morley. “We know that the private equity industry is very good at taking unloved, neglected assets and rapidly honing its business model to make it more efficient and effective. The same is true in sustainability.”
Diversity: Improvements over ownership
Stronger gender diversity in management correlates with PE ownership, BCG found: the proportion of women on management teams was 5 percentage points higher among PE-backed companies than public companies in 2022.
Longer private equity ownership correlates with further outperformance on this front: companies held by private equity for more than two years had 8 percentage points more women on management teams than public companies.
This correlation is likely because private equity owners bring in “better talent management systems, so [PE-backed companies are] identifying, recruiting and promoting talent irrespective of where that comes from, and bring in other perspectives from externally, and refreshing the leadership team over the duration of the holding period,” says Morley.
“In years one and two, we see that the firm is understanding the baseline, getting the data and thinking about the strategy of the business.” Reforms are typically implemented and their effects become evident after this period, says Morley.
Board diversity: the exception
But PE-backed companies lag behind public companies on gender diversity on their boards, BCG found. Fifty-seven percent of PE-backed companies in the EDCI data set had at least one woman on their board in 2022, while 90 percent of public companies had at least one woman.
“One in two companies in the EDCI have no women at all on their boards. That’s only true for 8 percent of public companies,” says Morley. “There are a few potential reasons for this disparity. Firstly, public markets have been really focused on this topic over the last few years. That’s not been as visible in private markets. And the nature of private equity is that you often have smaller boards and deal team members serving as board members – and we know that [private equity] firms themselves are not necessarily particularly diverse. There’s clearly opportunity for further improvement there.”