Private equity fund managers are watching 2022 closely, focusing on numerous potential road bumps, including labor shortage issues, the war in Ukraine, rising interest rates, and the overall general economic climate, which has taken a bit of a nosedive since 2021. But few M&A gurus could have predicted that these same fund managers would be so intensely focused on ESG, the environmental, social, and governance criteria that is making entrepreneurs think twice about how they conduct business.

According to BDO’s Private Capital Pulse Spring 2022 Survey, which tapped 200 U.S. middle-market private equity fund managers, 99 percent of them have already raised an ESG or “impact” fund, 95 percent are evaluating targets’ ESG potential during the due diligence process, and 50 percent plan to deploy the most capital setting up impact funds or investing in companies with ESG-focused themes. 

The pressure to take such steps is coming partly from limited partners, BDO reported. According to the survey, “Last Spring, 94 percent of private equity fund managers said their limited partners (LPs) were clamoring for them” to integrate ESG investment criteria into their investment plans. ESG, mildly put, is seen as a “value creation strategy” and can be shown as a “deep part” of a firm’s purpose. Nearly 38 percent of fund managers were implementing an ESG policy “in order to ‘do their part’ to address the threats of climate change…”, the survey noted.

Fund managers also believe having a solid ESG policy could help them attract and retain talent, particularly given today’s labor issues. And an ESG edge could also help private equity firms win deals in what has become an incredibly competitive M&A environment, BDO reported.

“The dollar isn’t speaking the loudest” anymore, stated Verenda Graham, BDO’s national private equity tax leader and a partner in the firm’s tax practice. Instead, people today are more socially conscious, and concerned about “what is being contributed to the overall global environment”, she said.

-Cheryl Meyer