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July 20, 2009

PRI Issues Guidance for Responsible Investment in Private Equity
    by Robert Kropp

Responsible Investment in Private Equity: A Guide for Limited Partners seeks to apply the Principles for Responsible Investment to the unique characteristics of private equity investing. -- With the goal of providing guidance to its signatories for Responsible Investment (RI) in the private equity asset class, the Principles for Responsible Investment (PRI) has issued Responsible Investment in Private Equity: A Guide for Limited Partners.

The Guide, which was developed by the PRI's Steering Committee on Private Equity, notes that "There is presently not enough widespread experience with the application of the PRI Principles in private equity investments to define 'best practice'."

Despite the fact that both public and private equity investors invest in companies, private equity investing has a number of unique characteristics. Referred to as Limited Partners, private equity investors cannot easily sell their long-term interest in a private company without the permission of the General Partner that manages it. The General Partner has almost all discretion over investment decision-making and ownership activities.

On the other hand, according to the Guide, "The ownership and governance model allows for a much closer alignment of interests between asset owners, the investment manager, and corporate management." Therefore, there is the potential for the exercise of influence on the part of Limited Partners over how managers address environmental, social, and governance (ESG) issues. The ownership and governance model also encourages significant levels of disclosure and ongoing engagement with Limited Partners.

Because Limited Partners are passive partners in the management of private equity funds, the Guide recommends that ESG issues be formally addressed before an investment agreement is signed. Limited Partners can accomplish this by providing General Partners with copies of their RI policies, and by explaining to General Partners their commitment to the PRI.

Following their investments in private equity funds, Limited Partners should concentrate on monitoring how ESG issues are integrated into investment decisions and other activities. In addition, the Guide recommends that Limited Partners engage with General Partners in order to foster ongoing dialogue on RI and ESG issues. Limited Partners can also ask General Partners to develop RI policies that build upon such initiatives as the PRI, the UN Global Compact, and the Private Equity Council.

As an accompaniment to the Guide, the PRI has also published Responsible Investment in Private Equity: Case Studies, which provides specific examples of RI in private equity.

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