Private Equity’s Value Creation Levers for Green Returns : Three Case Studies of Growth-Orientated SMEs

Abstract: Sustainable investing is an investment trend that has arisen in the past decade. The private equity industry has proven effective in providing financial returns and is increasingly shifting its focus towards green assets. This enables private equity firms to facilitate investors' demand for financial returns alongside non-pecuniary benefits, such as positive environmental impact. Contrary to other funds, private equity firms use their fund capital to invest as a majority owner in private companies that they see potential in actively improving for a few years. This study intends to demystify private equity's value creation by studying the private equity firm Alder's engagements with three selected sustainable portfolio companies, while also suggesting improvements for Alder's future work. The study's research method takes on a qualitative approach, using thirteen semi-structured interviews, to triangulate Alder's perceived value-added within and between portfolio companies. The analysis takes on an abductive approach and results in four levers of impact used by Alder to create value for its portfolio companies. The suggested levers of impact are: i) Alder funds its portfolio companies’ growth endeavours, ii) Alder strengthens its portfolio companies' sustainable profile, iii) Alder supplies its portfolio companies with significant process and industry experience, and iv) Alder ensures a scalable governance structure at each portfolio company. Given these levers of impact, the following suggestions are proposed to Alder: i) Alder should exclusively target private-to-private deals, ii) Alder should target industries it has experience in, iii) Alder should clarify the sustainability ambassador role, iv) Alder should include additional sustainability-linked goals in its owners’ agendas, and v) Alder should continue to appoint an external chairman of the board in each portfolio company. The new suggested levers of impact stem from the finding that the discussion of private equity's value creation would benefit from departing from the traditional levers of impact, initially promoted by Kaplan & Strömberg (2009). That is, financial, governance and operational engineering, as these are found to be of limited relevance, as private equity's active ownership seems to be inherently concerned with corporate governance.