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New Green Portfolio Program Could Change Private Equity

With its emphasis on environmental responsibility, a trendsetting alliance between leveraged buyout giant Kohlberg Kravis Roberts & Co. and the nonprofit Environmental Defense Fund could change the private equity business.

Private equity firms control about 8 percent of U.S. GDP through their portfolios, notes Audrey Davenport, a manager in New York–based EDF’s corporate partnerships program. “That’s pretty powerful for us, a small team looking to drive change through the private sector,” says Davenport, point person for the alliance with New York–based KKR, whose investors include some 40 U.S. public pension plans.

Today, 16 companies in seven countries — more than 25 percent of the names in KKR’s $46.2 billion private equity portfolio — belong to the Green Portfolio Program. As of June 2010 they had saved $160 million by cutting 345,000 metric tons of carbon emissions, 1.2 million tons of waste and 8,500 tons of paper.

Elizabeth Seeger managed the EDF side of the pact from its May 2008 launch, then joined KKR early last year to work with the 60 operational experts in the buyout specialist’s Capstone group, which helps portfolio companies make across-the-board improvements. “Because this program is the first of its kind, there’s a lot to learn and improve on over time,” Seeger admits.

Could KKR’s interest in environmental footprints simply be greenwashing? Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business, doubts that’s true. “They would not undertake major initiatives like this unless they thought it could have very positive impacts on the fundamental business they’re in, which is improving companies to make money for investors,” Blaydon says of KKR.

The Green Portfolio Program began taking shape in early 2007 amid negotiations for the $45 billion takeover of Texas power company TXU Corp. by KKR and fellow private equity firm TPG Capital. For months EDF had been loudly protesting TXU’s plans to build 11 new coal-powered plants. William Reilly, a senior adviser at TPG, asked EDF to help broker a deal that would please both sides. KKR and Fort Worth, Texas–based TPG slashed the number of new plants to three. They also agreed that TXU would reduce its carbon emissions to 1990 levels by 2020, tie executive compensation to climate goals and double spending on energy efficiency. In return, EDF publicly blessed the deal.

KKR and EDF then kicked off the Green Portfolio Program with a pilot project to improve environmental efficiencies at magazine publisher Pri­media, mattress maker Sealy Corp. and food distributor U.S. Foodservice. Using the program as a blueprint, EDF hopes to develop codified processes and tools for the private equity world. In March 2010 it joined forces with $108 billion, Washington-based private equity firm Carlyle Group to launch EcoValuScreen, a due diligence tool that looks for opportunities to create value through better environmental management at potential portfolio companies. “Two years ago, when we talked to private equity firms, they would say, ‘Why does this matter?’?” EDF’s Davenport recalls. “Almost universally, the conversations have shifted to ‘How do we do something?’?”

In June, London-based media group Private Equity International held its second Responsible Investment Forum, which encourages firms to consider environmental, social responsibility and corporate governance (ESG) issues. New hires also highlight the trend: Doughty Hanson & Co., Riverside Co. and TPG are among the private equity shops that have recently recruited ESG specialists. “By focusing on these considerations, we can hopefully make an investment more profitable and can mitigate potential risks,” says Bryan Corbett, a principal in global government and regulatory affairs at Carlyle. • •

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