As wealth accumulates in the upper echelons of our global economy, there are growing pockets of private equity investors who are seeking to deploy their capital for both returns and good.  In this piece with Jean Baptiste Oldenhove, CEO of Estari Group, we hear from one of these visionary investors.  Perhaps there is some mix of super-wealth, investment opportunity, innovation and sustainable development which can move the needle on many of our most pressing concerns.  Tim Nixon, Managing Editor, Thomson Reuters Sustainability.


Tim: Does the lack of progress on climate create new urgency for private equity investors?

Jean Baptiste: There is no question about this. We all need to do our part, including investors. Of course, the fiduciary duty of a private equity investor is to deliver financial performance. At Estari Group, we believe that we are able to deploy private equity to deliver financial performance AND at the same time make a contribution to climate change.

Obviously important in itself, climate change is not the reason why private equity investors need to act quickly. The sense of urgency comes from three distinct stakeholder groups. The first is investment talent. Talent from generation Y and Z will no longer join the firms that don’t act on climate change. Secondly, limited partners in particular foundations, family offices and endowment funds that integrate sharper climate change considerations into their investment decision process are becoming much more discerning. Finally, consumers themselves are acutely aware of the climate crisis and are increasingly making consumer choices that will ultimately impact the portfolio companies of private equity investors.

Tim: How can private equity create an impact which may be different from other investors?

Jean Baptiste: Over the centuries, fundamental changes and disruptive innovations have been supported first and foremost by private capital. The reasons for that are both that private capital can take higher risk than more established retail/corporate type of capital and that private capital can be more patient to see returns on investment.

Within private capital, there is a smaller but very powerful group which is private capital owned and managed by single individuals or families. The source of that wealth comes invariably from the long-term vision of highly successful entrepreneurs who have created foundations and family offices, now nurtured and governed by family members. This group of investors is, in fact, a hyper catalyst of change.

Tim: Do private equity investors have a unique view on emerging innovation?

Jean Baptiste: Yes, they do. Private equity organisations are built around nimble and lean teams. These teams include top talent. The combination of top talent and agility is ideal to identify and pursue innovative companies. On top of this, private equity investors are super connected throughout the economy and can read and act on future trends (M&A, consumer trends, venture-backed emerging technologies, etc.) ahead of the curve.

Tim: How much do concessions on returns factor into achieving these climate goals?

Jean Baptiste: The idea that investing in businesses and projects positive for our planet requires concessions on return is a misconception. A 2019 study by Bain & Company of over 450 private equity deals in Asia over the last 5 years indicates that median multiple on invested capital was 3.4 for deals with social and environmental impact, compared with 2.5 for other deals. Bain also observed lower variability in returns for these deals[1].

What drives return in private equity is talent. Top investment talent has not yet been attracted to “sustainable” private equity but this is changing fast, and Estari Group is part of that change.

The other source of above normal return will come from the co-operation between intelligent capital sources (public, private and institutional) to aggregate massive resources behind the technologies and projects that are “system changers” but have not yet hit the right capacity and affordable price points.

What is really exciting is that investing with a view to ultimately positively impact climate change in fact creates a unique opportunity for financial performance over the coming decades. Why is this? Just think that we will be able to help move massive amounts of capital from an old, carbon intensive economy into a newer more efficient economy. It is unprecedented in magnitude and will be bigger in value creation than the 2 decades 1860 and 1870 that witnessed the highest rate of fortune creation in the history of humanity (among the 75 richest people of all time, 14 are Americans born between 1831 and 1840 and who could perceive and seize the opportunity of these 2 decades where railways expanded and an industrial revolution took place)[2].

Tim: What would further accelerate the rate of investment by private equity investors?

Jean Baptiste: On top of the pressure from future investment talent and limited partners, what would increase the rate of investment would be an increase in returns from investing into a low carbon economy and/or transforming current portfolio companies towards more sustainable practices.

One way to increase the return is through public authorities. Public subsidies have been a major accelerator of adoption of innovation. Germany and its generous Energiewende[3] launched in 2010 kicked off a revolution in the adoption of the solar PV technology, which was quickly followed by Japan, the US and China (9 GW installed globally at the end of 2009, 637 GW expected at the end of 2019).

In time, market forces will be unleashed that will drive the change that we would all like to see. For example, the return of private equity funds going after deals in consumer goods (such as KKR’s flagship 2018 purchase of Unilever’s Spreads) will be much stronger if the business integrates strong underlying consumer trends such as plant based ingredients and sustainable packaging (effect on top line, potentially bottom line and on multiple).

Tim: Is there a way to accelerate this market force?

Jean Baptiste: As in any change, increasing trust in data available and educating the key stakeholders (public and investment community) would go a long way to help accelerate the change. There are interesting initiatives aimed at integrating non-financial data to sharpen investment processes, most of them proprietary initiatives by major institutions such as Schroders, Pimco or MSCI to mention a few.

Estari believes in the power of open innovation and we have defined an initiative on the integration of non-financial data in plain vanilla corporate bonds. The initiative is gaining a lot of traction and supported by a consortium of partners. It aims at identifying technology innovation and teams that can deliver the data analytics required to move an important part of this $100 trillion of capital towards sustainability.

Tim: Does it make sense for a private equity investor in any instance to invest in a carbon intensive business?

Jean Baptiste: While short term gains can still be realised, the ones which will be caught with a carbon intensive portfolio might be forced to keep it forever on their books (creating a first example of private equity carbon sequestration…).

This said, the businesses that are carbon intensive but beginning to change offer potential for high value creation. I am particularly intrigued by the transparency initiative led by Thomson Reuters on the largest carbon emitters and the identification of the “risers”[4].

Tim: What led you to found Estari in 2018?

Jean Baptiste: 10 years ago, I received the chance to create and lead a large principal investment strategy for a single family that is today one of the few global investment platform in clean energy, agriculture or sustainable fashion.

Estari was born in 2018 out of a deeply held belief that the next decade would be about re-centering the economy to serve people. Estari is a cause – a movement to bring investment talent, leading corporates, innovators and intelligent capital together to allow tomorrow’s economy to come to life.

Tim: What gaps in the private equity market are you trying to fill?

Jean Baptiste: On one hand, the private equity industry of today is a model which is too costly[5] to deploy the amounts required to address the current planet issues and to create tomorrow’s economy. On the other hand, there is a growing willingness for capital to be deployed towards that new economy (an estimated $15 trillion of wealth that will be passed to the next generation in the next 5 years). Estari’s conclusion is that there is a need for a leaner and different PE model, allowing the capital to flow with less friction towards innovation and change. And that the key for this model to be successful will be to attract top investment talent of the next generations (Y and Z to come).

Tim: What are you most excited about in your next career step?

Jean Baptiste: The change we will bring as a group over the next decade. The people we will meet along the way. And the value that we will create together.

[1] Asia Pac 2019 PE report, Bain & Company

[2] Outliers, Malcom Gladwell – these are the Rockefeller, Carnegie and Vanderbilt of this world

[3] http://www.energiewende-global.com/en

[4] Risers are entities committed to a transformative vision but that have not yet demonstrated progress on execution (Constellation’s Climate Impact Maturity Curve, see https://www.constellationresearch.com)

[5] As per Warren Buffet (here) “My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.”