Pandemic accelerates sustainability investing, private equity fund manager says
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Sustainable investments have gained a lot of weight in the asset management world in recent years.
It is a growing dynamic that ranges from traditional investment funds to private equity. There is less and less time left for them to be considered mainstream.
Business Insider Spain spoke exclusively with Oriol Pinya, CEO and founding partner of Abac Capital, a private equity fund that recently received the highest rating in the annual assessment of the United Nations Principles for Responsible Investment, to analyze the rise of this strategy and the potential it offers.
As he explains, there are going to be more and more sustainability issues, and also from the management sector, there is going to be an increased appetite for this segment. "There used to be four of us advocating sustainability, whereas now everyone is joining in and there is a boom because they realize that this is a matrix and not a straight line, and therefore there is the possibility of earning more and doing things right. And who doesn't like that? There are success stories of people who, by doing things responsibly, have earned a lot of money," he asks.
In this sense, he assures that for Abac, sustainable criteria have always been very important. "Since we started, we said we would invest in sustainable value investing: seeking returns for our investors, but doing it in a sustainable way... It's a goal to say that not everything goes," he acknowledges.
Pinya says COVID-19, if anything, has accelerated this trend. "What has changed in recent years, and especially now with the pandemic, is that sustainability has become a necessary and sufficient condition," he says. "It is increasingly clear that this is not a straight line, but an axis on which the concepts of more or less sustainable and making more or less money pivot; and where you can place yourself in a quadrant where you can be sustainable and make a lot of money on top of it," he says.
And that is what Abac is looking for in the private equity space - that is, investments in other private companies with high growth potential in exchange for controlling a percentage of the company or its shares.
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In this regard, Pinya recalls that private equity has always had a historical stigma, often due to ignorance, about its activity, although he stresses that in the end, the money comes from savers from all over the world and institutional, which has very serious selection processes to see who they give the money to where it is required that the operations are developed rigorously. "In short, not to generate extra capital at the cost of damaging the environment, the social or governance aspects of the companies," he explains.
Therefore, he describes that the frameworks, the analysis schemes that are being created for sustainability issues, somehow help to reflect on how to improve the business: "How you can do things better in your company to be sustainable while being more profitable, which is a perfect excuse to constantly reinvent your business".
Pinya exemplifies this as follows: "To invest I want to know that the washers on beer cans are not made with plastics, but with sustainable products, or that when I buy jeans they are not made with excessive water consumption (...) That consumer pressure, in a way, is fantastic, because it forces the rest of us to do things better."
Applying responsible investment principles and doing your mother's or grandmother's test
How to apply the criteria when investing is one of the concepts being debated within the asset management industry. How does Abac do it? As Pinya tells it, there are a number of sectors and practices that they simply don't go into.
"For example, in pornography, alcoholic beverages, or gambling we are not going to invest," he describes.
However, he then highlights that there are some possibilities that are more debatable. "So what we do is, when an investment opportunity comes up, if we see that there is something that we are concerned about the business model or some issue that is unclear, we have the discussion of whether we should go in or not."
As he points out, a reliable method is what is known as doing the test of your mother or grandmother. "Tell them: 'I invested in this company today and if they make a funny face, don't invest,'" he says.
Following this example, he says they have had a couple of situations where they decided not to go forward with the operation because they didn't feel comfortable having to tell our children, who owned that type of company.
"I would give the example of a well-known nightclub company that makes a lot of money... Do I want to be on the board of a nightclub company that encourages people to drink more and you know what goes on in a nightclub? I can't tell my children in the mornings to go home early and not drink too much, and in the afternoons be on the board to see how we can get people drunk to make more money," he says. "It's an act of hypocrisy that we choose not to get into," he adds.
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That would be Abac's first red line. Then what they develop is an analysis, a due diligence of the ESG part. "We analyze in-depth to make a diagnosis of the situation and draw up a plan," he says.
The company has a very specific plan to make sure that things start to change in that company to be more aligned with its purpose and that, therefore, sustainability is in the image of the CEO of the investee company.
To do this, something that Pinya believes works reasonably well for them is that in each investee they ask someone to take on the role of Sustainability Champion: the person in charge of leading those efforts in that firm and being sure to deliver on that sustainability agenda.
"Then we have a set of 60 indicators on sustainability issues, which we incorporate in all the investees so that we ask them for quarterly reports on how they are progressing in these variables," he explains.
How they build portfolios: the focus on family businesses
Pinya comments that the money comes from American universities, pension funds, bank funds, or insurance companies that channel the savings of retail investors. Within the investment scheme, it is always said that one must have a part in fixed income, equities, but also in alternative assets.
"Within this space, there is a small part of these large funds, between 5% or 10%, in which companies like us pass the saucer from time to time and end up giving us the confidence," he says.
Abac manages the Abac Solutions 1 fund, which was launched in 2015, to invest in medium-sized companies: with billings of up to €100 million and EBITDA of between €5 million and €11 million. Firms that have intermediation, digitalization, professionalization, and sustainability challenges. Therefore, when they see companies of this style, they try to buy.
"Normally they are family businesses where the founder has been a genius and figure, who are in a moment of vital change, and who are looking for a new partner who either buys the company totally or partially so that he can think about doing something else and leave his business in good hands," he analyzes.
That, according to Pinya, is where many consolidation processes are taking place.
The pandemic is accelerating the transformation of the Spanish industrial fabric and somehow we realize that the companies that are suffering the most are the small ones, while the large companies have more alternatives to hold on to.
"This is clearly going to accelerate concentration and people like us, the funds that provide liquidity to companies to help them buy, obviously have a tailwind," he says.
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