KKR, Carlyle take closer look at development

A development agenda has become a major criterion for private equity firms seeking agri investment opportunities in emerging markets, according to Alex MacGillivray, director of development impact at CDC, the UK-based development finance institution.

MacGillivray has noticed the increased interest when working on co-investments with major private equity firms in Africa and Southeast Asia, he told Agri Investor.

“Major private equity firms are much more interested in the development impact of their investments than they used to be – it’s a discernible trend,” said MacGillivray. “It only takes one bad deal to ruin a firm’s reputation.”

The advanced commitment to development comes alongside increased interest in pursuing responsible and environmental, social and governance (ESG) investing principles and as mobilising private capital is part of CDC’s mission, the DFI helps private players by sharing due diligence on potential investments. It also offers training on implementing ESG principles – a service that has been increasingly in demand, according MacGillivray.

Numerous factors have prompted a more advanced commitment to development and responsible investing, most notably ensuring increased investor comfort when it comes to investing in new sectors such as agriculture and new markets such as CDC’s focus regions of Africa and Southeast Asia.

“An important pressure point was from investors themselves, who wanted to know more about how we planned to conduct ourselves in these new environments,” said Ludo Bammens, director of European corporate affairs at KKR. “During fundraising there is more dialogue around responsible investing principles. Some LPs are very sophisticated, and approach us with their own policies and criteria on these issues.”

“The presence of environmental impact assessments in our investments, for example, is the kind of formal policy that makes LPs comfortable about investing in a particular country’s agriculture sector,” he added.

Another factor is the wider demands of consumers, according to Jacqueline Roberts, global head of ESG at Carlyle Group. “Portfolio companies have conscious customer bases in terms of ethics,” she told Agri Investor. “Surveys of the big corporates, show ESG principles to be ranking in the top three list of priorities,” she said. The firm recently released a new firm-specific ESG publication, Corporate Citizenship 2014.

KKR’s recent investment into Afriflora, the Ethiopian flower producer, is an example of an investment with a keen focus on impact and development; Afriflora provides funding for education, healthcare and a sports stadium for its employees and the local community. KKR also identified Afriflora’s fairtrade and best practice certification in its due diligence as contributory to fulfilling the investment firm’s own ESG criteria.

And these responsible and development-aware commitments can reap financial rewards, according to previous research by CDC. A 2009 study of CDC’s portfolio companies showed internal rates of return were correlated with the quality of a company’s ESG management systems, according to CDC’s MacGillivray.

The World Bank and the United Nations Conference on Trade and Development also released a report earlier this year proving that investors with the most positive impact on the surrounding community and host countries as a whole, were the most financially and operationally successful.

The importance of ESG and responsible investing first came to light in the wake of increasing numbers of billion dollar deals overseas around 2006 and 2007, according to Bammens.

“[We] became subject to a higher level of scrutiny as the impact of private equity investments increased,” said Bammens.

As investments into emerging markets such as Africa increase, responsible investing will become a mainstay for private equity firms, says Carlyle’s Roberts. “For the entire PE sector, the adoption of ESG principles has been a real seismic shift,” she said. “It’s not easy but it’s an aspiration companies need to have.”