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Mishcon Academy: Purpose Matters – Purpose in Private Equity – a long term view in a short-term game?

Posted on 19 March 2021

Earlier this month as part of our Purpose Matters series, Alexander Rhodes, Head of Mishcon Purpose was in conversation with Managing Partner of The Future Business Partnership Tracey Huggett, and Head of Mishcon de Reya's Private Equity Group Nadim Meer about how ESG information improves the allocation of private capital and whether the objective is value or returns.

If you would like to find out more about Future Business Partnership and how they work with ethical and sustainable consumer businesses to help them reach financial success while empowering change for good, you can reach them at team@futurebusinesspartnership.com.

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

Alex Rhodes

Welcome everyone, thank you for joining us.  I’m Alex Rhodes, the Head of Mishcon Purpose and I’ll be your host today.  This one is the second in our 2021 Purpose Matters series and today, we are going to talk about the growing importance of purpose in private equity.  For several years now, private equity houses have been responding to investor demands to take account of Environmental, Social and Governance – or ESG criteria – in their policies.  Of course, the industry is also having to respond to new legal and regulatory requirements which are emerging.  Understanding the developing regulatory environment is critical because it’s fast moving but it’s also complex.  Perhaps the most interesting development is where some in private equity are changing the business paradigm and not looking from an ESG perspective of risk but rather through the lens of opportunity.  And they are actively embracing purpose-led business as a route to value creation.  I’m really excited today to be joined by Tracey Huggett, the Managing Partner of the Future Business Partnership and Head of Mishcon Private Equity, Nadim Meer. 

Tracey, thank you for joining us.  You’ve got 20 years of private equity experience working at some of the big established houses across Europe and you’ve now Co-founded the Future Business Partnership which is a purpose-led private equity business where you’re a Managing Partner and I thought to start us I’d ask you, what’s your mission?

Tracey Huggett

We are a new private equity fund that only invests in the best sustainable and ethically minded B to C and B to B consumer businesses in Europe.  And our mission is to make money by doing good.  So, purpose is at the centre of our investment strategy and ethics are at the centre of our business model.  Our return objectives are commensurate with the top quota private equity returns for mid-market growth equity and buy out shops in Europe.  We don’t see a conflict at all between profit and purpose.  We see the opposite. 

Alex Rhodes

Is it, is it just a, a sort of type of brand do you think or do you think all businesses are moving in this way?

Tracey Huggett

I think all are but it has to start somewhere and actually the consumer is driving a lot of what we’re seeing.  The individual.  We’re in the information age, we are all aware now more than we’ve ever been before and of course the share of wallet is moving to a much more conscious consumer. 

Alex Rhodes

Nadim it sort of chimes very much with our view of the world at Mishcon’s, I know but does what Tracey’s saying reflect what you’re seeing in the market?

Nadim Meer

We’ve been banging the drum for quite a few years now and over that time there’s been a slow but steady shift in this direction that we’ve seen.  But I really feel like in the last year with the pandemic, it’s given a lot of businesses pause for thought.  Time to re-evaluate their purpose and many have come to the conclusion that business as usual is no longer an option.  So, I think last year in terms of the entrepreneurs, founders and a lot of businesses that we’ve come across the shift in that direction, that direction of travel seems to have reached some sort of tipping point. 

Tracey Huggett

Nadim, you mentioned a slow and steady shift.  You know, this is you know, absolutely the case.  You know, we look at some of our core statements like ethical food and drink,  this has been growing at 15% per annum over the last 20 years but you know, there are some acceleration of trends and not just linked to Covid for example, vegan.  Such a good example.  This was niche like two or three years ago you know, and it’s gone mainstream.  It’s because people are really caring about climate change and they’re really caring about animal welfare.  I mean I was delighted to see and I know we’ve spoken about this already, Nadim, but B-Corp aisles are now open in Boots and Ocado.  B-Corps are defined as businesses that meet the highest standards of verified – so actual verified – social and environmental performance.  So, you know these big retailers are acknowledging their customers are looking for these products. 

Alex Rhodes

If purpose and profit are juxtaposed but actually are aligned, how do, how do you do that?

Tracey Huggett

If we look at consumer businesses that are led with superior ethics, these brands are enjoying a much better customer retention and loyalty so, you know high-lifetime value.  And also lower customer acquisition costs so more efficient marketing.  And it’s an important point when one ponders how the most successful purpose-led brands you know, we all know them, Patagonia.  Ben and Jerry’s, these are the most successful financially and best-known purpose-led brands and these businesses have never taken a dime from private equity.  When we looked at how we structured ourselves it was really important for us to demonstrate to these brands, these eth… these brands where this is so much a part of their business and their business proposition that we were ethically aligned.  You know, we are a B-Corp ourselves so, from inception we have been able to show that we’re ethically certified.  You know, we care about inclusivity so, we are a diverse team.  We care about transparency so we’re onshore you know, we wanted to make sure that we were easily recognisable to these leading, leading and the best ethical firms and sustainable consumer brands.  So, this is going to be important for a Founder that doesn’t want to take on capital or sell their business to, to a partner that is not… who is going to ask them to sacrifice their values or their legacy. 

Alex Rhodes

There’s so much pressure for people to be behaving a certain way.  The risk of greenwash is enormous.  I mean, when you’re trying to take the approach that you do and you’re looking at businesses, how do you get under the skin and really understand them in that way?

Tracey Huggett

We find that the B-Corp, the B-impact assessment is actually a very useful window into the brand’s ethical and sustainable DNA.  It looks across the business, not just at the product.  It looks at its supply chain, it looks at its work environment, it looks at how it gives back to community you know, it’s comprehensive. 

Alex Rhodes

I mean, Nadim we’re, we’re big fans of B-Corp of course.  How are companies using the frameworks to get ready for investment? You know, how are you and your team helping companies to sort of pivot?

Nadim Meer

It’s hard for us.  I don’t think we as lawyers can go and convince an entrepreneur they need to go down this route and then they can have loads of PE people chasing after them.  Even though that might actually be true but no-one’s going to believe me.  When they’ve had that kind of ‘Come to Jesus’ moment and they’re in that zone there’s plenty of things that can be… that they can do with a business and that we can do to help whether it’s guiding them through elements of the impact assessment that, that Tracey mentioned if they’re having to review their supply chains, put in certain policies regarding their employees, structures for employee ownership.  There’s lots and lots of things that, that we can do. 

Alex Rhodes

We’ve been using the B-impact assessment within our own firm as a tool, as a process to review our business and the way, the way that we operate it.  It’s really interesting the prompt for things that you, that you notice and the key thing I suppose for us was thinking about impact.  Tracey, when you’re using the, the you know, this process, what is it that you’re… what is it that you’re looking for in companies?

Tracey Huggett

We say that we partner with the best when it comes to sustainability but really the pace and direction of improvement is just as important as the starting point.  So, they don’t have to be the best at every aspect of sustainability at all.  We have an impact plan agreed and the direction of travel’s sort of set with, with our partners before we invest and upgrading ethics over the life of the investment is really, really important for us.  And also you know, by, it’s by embedding that in the culture of the organisation and also to structure the incentives around it.  Throughout the organisation it’s amazing the results that you can have in moving businesses forward on impact. 

Alex Rhodes

So, both sort of performance you know, they have to be a leader and transformational or the rate of change are important.  I mean, are they equally important? Is one more important than the other or…?

Tracey Huggett

The need or the priority to continue to improve and this is a really important part of the business it’s really the most important for us.  We link our carry, our carried interest, which is a commission we earn on the capital gain we make to not only delivering financial return but also progress on environmental and social impact.  So you know, we… this commitment, this buying with us to continue to improve and have results. 

Alex Rhodes

So, you only get paid if your bet… if the company you invest in one, does well financially but also if it improves in terms of ESG criteria?

Tracey Huggett

This is the moment to really lead and we think nowhere is better than actually making a promise that people know we’re going to keep. 

Alex Rhodes

Nadim, this, this whole point around speed, around the, the trajectory of change it feels like, as you, I think you said earlier you know, ‘We’ve come to a turning point or a tipping point’.  What is it that you think has, has, has sort of underpinned that change?  What has changed?

Nadim Meer

I think what’s changed is that the, the idea that purpose will make a business more profitable has become more mainstream.  As an example, if you look at the announcement that came from the business round table like almost two years ago now – a very bold statement to say that we can’t carry on with business as usual, we’ve got to look beyond shareholder primacy as the driving force behind business. 

Alex Rhodes

So, if it’s the mainstream investors, are we at the point where, where this is just all investing or are we still on a, on a transition there, do you think?

Tracey Huggett

We are both talking to kind of the main primary fund to fund teams as well as the impact allocations within those teams.  So, you know, we’re talking to both.  So, I think there is an increasing presence of impact as, as an alternative within these big funds but certainly not in all that we’re talking to. 

Alex Rhodes

Nadim, you know reputation obviously is such an important thing for everybody involved.  Are some of your clients you know, the owners, the owner/managers saying, ‘Hang on a minute this is my business.  This is what it stands for’ and the conversation is possibly slightly different when they’re going looking for capital?

Nadim Meer

It’s just generally become harder for PE houses, i.e.  it’s becoming easier for good businesses to pick and choose which PE investor they’re going to partner with.  That’s going to be increasingly the case when you’re looking at impact too because if the business has got a choice they’re going choose the right kind of investor that suits their values and if you’ve built purpose into your business model and you sell out to an investor or corporate that has completely different values, you’re going damage your business. 

Alex Rhodes

Tracey, big bad private equity and compatibility and alignment all of this stuff is long-term.  Is there a conflict there in terms of short-termism in the business cycle and long-termism in terms of what’s trying to be achieved?

Tracey Huggett

You know, when you build a brand and you allow it enough time to reach its full potential this takes time and locking in – future proofing these businesses from the ethical standard point of view so that you’re confident that they can continue to flourish from an impact point of view long after you’ve gone – this takes time.  Exactly as you say but we don’t see this as being incompatible with our, our fund maturity.  We see ourselves as patient capital so we will, we will adjust according to each situation. 

Alex Rhodes

There’s a lot of chat at the moment about company law, purpose, should the, should the law around corporates and corporate purpose change?  I mean, where is that argument going and what do you think?

Nadim Meer

In the US, for B-Corps what they did was they went round state by state and they changed the law in every state and so if you’re a B-Corp you incorporate as a completely different type of legal entity.  The UK obviously, it’s a bit different.  We did things a bit differently which what the decision was around B-Corps anyway was to layer some additional specific language called the B-Corp legal test on top of the existing Companies Act wording.  The B-Corp language changes it, removes shareholder primacy but that’s something that you have to build into your articles yourself.  There seems to be or there are, we’re aware of moves afoot in the UK which we’re involved with looking at just changing the Companies Act completely to essentially hardwire the equivalent of the B-Corp language into section 172 of the Companies Act so that it goes straight in.  The default position will be you’ll have that wording in and be bound by it.  So, it won’t mean that every English company suddenly becomes a B-Corp but it will mean that you sort of create this paradigm shift away from shareholder primacy. 

Alex Rhodes

It’s really, it’s just so interesting to see the rate of change and as usual sort of law and regulation following you know, what’s actually happening in the, in the market.  And thinking about you know, well, for the longer term, what’s the structural build that’s actually necessary to support this, this, this change and way of working  as we go forward.  Well, look, thank you both very, very much.  It’s been, it’s been great and thank you everybody else for, for joining us.  And I think what remains is for us to say ‘Goodbye’ and ‘Thank you’ and look forward to seeing you next time. 

Tracey Huggett

Thank you, Alex. 

The Mishcon Academy Digital Sessions.  To access advice for businesses that is regularly updated, please visit mishcon.com. 

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