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ESG rises on private equity agenda despite dealmakers failing to see financial value

Sustainability has shot up private equity firms’ decision-making agenda despite a majority of dealmakers not considering it to deliver significant financial value, new research has revealed.

Research from Big Four firm KPMG found that concerns over environmental, social and governance (ESG) factors had caused nearly three quarters of UK private equity firms to step away from a deal, with the figure rising to 90 per cent among bigger firms.

But just four per cent of private equity firms surveyed considered ESG as a key lever for delivering financial value in a business.

Rajesh Sennik, partner and value creation practice lead at KPMG, said: “Most firms are looking at ESG factors early in the deal process, and, if that review raises sufficient concerns, investors are more than willing to walk away. 

“In fact, over 90 per cent of the largest firms in our survey have declined an investment due to concerns over ESG performance. When looking just at the UK, almost 73 per cent  of private equity firms have stepped away due to ESG factors.”

But Sennik said that ESG remains “relatively underappreciated” as a value creation lever for the industry. 

He added: “We expect that to change as the benefits of ESG factors are better understood and become more integrated within valuations.”

Warning

In its ‘Delivering the promise of value creation’ report released today, KPMG warned that private equity firms must look beyond a traditional  ‘buy and build’ approach as the so-called ‘value levers’ in the industry change. 

KPMG said that ‘buy & build’, in which firms look to purchase a target company with the view to making subsequent ‘add-on’ acquisitions, remained the most important value lever for private equity firms, but technology transformation was set to become a top three value creation lever in next three years.

KPMG’s report said that the availability of data was allowing firms to look at a broader range of value levers when making deals.

Sennick added: “Traditional levers like ‘buy and build’ and ‘people and talent’ remain central to many of those value creation strategies – for now. 

“The availability of additional sources of data enables firms to identify many more potential levers for each opportunity,” he concluded.

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