Case study by Apax Partners
- The implementation of an ESG strategy requires careful planning and dedicated resources.
- A GP can survey their LPs to understand expectations and obtain support for an ESG strategy.
- A GP can assign responsibility to a point person within each portfolio company whose activities are monitored by the GP fs ESG team.
Funds managed by Apax Partners MidMarket (Apax) invest in fast-growing companies across six sectors of specialisation: Technology, Telecom, Media, Retail & Consumer, Healthcare, and Business & Financial Services.
Approach to responsible investment
Apax decided to implement a comprehensive ESG strategy for three reasons: intrinsic motivation within management, growing demand from LPs and the belief that Apax can really make a difference as a majority shareholder in most of its 17 portfolio companies. Apax believes the demand for ESG accountability in all business activities will continue to grow, not least because it is in the process of becoming a compulsory part of public and private company reporting in France.
Defining and communicating an ESG strategy
Apax offers this advice to peers developing an ESG programme: create a step by step plan to get initial momentum through simple actions, and be ready to dedicate resources to this significant effort. The first step was to assign a senior partner responsibility for setting up the ESG programme. Apax then hired a consulting firm to carry out a survey of their LPs and to define an ESG strategy, based on both risk management and value creation. The ESG programme was presented during a strategic off-site meeting to obtain firm-wide buy-in.
Establishing the rationale: LP survey
The survey focused on three main topics:
- whether a GP should address ESG because of risk management issues or value creation potential;
- what the LP was currently doing to assess a GP fs ESG practices;
- how the LP was currently following up after due diligence.
The survey revealed that the majority of respondents see ESG issues as increasingly important, beneficial from a risk management perspective, and a means to create value. Half of the respondents used ESG specialists to assess ESG practices within GP firms and a quarter gathered statistics on their GPs f ESG practices. These responses reinforced Apax fs commitment to their ESG strategy.
Integrating ESG at Apax
After organisational buy-in had been achieved and an ESG strategy had been defined, Apax became a PRI signatory in November 2011. Signing the Principles is one action within Apax fs ESG programme, rather than the programme driver. Other initiatives undertaken during the initial phase included a carbon emission assessment at Apax, participation in ESGrelated conferences and surveys, and inclusion of an ESG section in their annual report.
Next steps were to organise staff training and to develop a dedicated ESG team with top-level involvement. The team, which is led by a senior Partner and includes a member of the investment support staff, reports directly to the firm fs President. Key decisions are made at the Strategic Committee level, comprising of the firm fs partners. An annual presentation on objectives and progress is made to the Executive Committee. This is also communicated to LPs and other interested stakeholders via Apax fs annual report.
The ESG team was then tasked with overseeing the total integration of ESG into investment processes. ESG due diligence is only conducted on recent and new acquisitions in the Apax France VIII fund, since ESG initiatives require significant time to implement before exit.
Integrating ESG within the portfolio
Apax fs ESG team is responsible for conducting ESG due diligence on portfolio companies, identifying company specific issues and defining (and ideally quantifying) objectives. Information gathered from the portfolio company is analysed to assess what improvements need to be made before exit. Apax works with company management to define ESG specific goals and to draw up a roadmap.
Apax’s ESG team monitors progress throughout the lifetime of the investment by appointing a person from the portfolio company to monitor and report on the company fs progress against the roadmap.
This process is resulting in tangible improvements that Apax believes will create value upon exit. Maisons du Monde, a home decoration retailer, is a good example of this, having been recently acquired from Apax (in partnership with LBO France and Nixen) by Bain Capital in September 2013. During ownership, Maisons du Monde focused on their purchasing policy for wood products as the avenue for greatest social and environmental impact. They require complete transparency from their suppliers on sourcing and encourage opting for wood certification in accordance with international standards. Through partnerships with NGOs in Indonesia, India and China, Maisons du Monde is improving working conditions at its suppliers f premises and supporting sustainably managed forests. Their responsible purchasing policy placed them third in WWF fs 2012 wood barometer. The example of Maisons du Monde demonstrates the value creation potential of improving ESG issues . a 20% increase in sales was generated by redesigning a sofa with social and environmental impact in mind, while reducing the cost and maintaining the same end user price. Prior to exit, Apax employed an external consultant to complete an ESG vendor due diligence . the first of its kind in France. The consultant interviewed management and reviewed internal documents to identify the relevant indicators before preparing a non-financial report for exit that presented the relevant ESG risks and suggestions on how to address them. Apax has since decided to systemise the inclusion of ESG in every vendor due diligence going forward.