Presentation by Richard Eyre

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Richard Eyre, Principal - UOB Capital Partners LLC - Thailand.

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Presentation by Richard Eyre

  1. 1. ASEAN China Investment Fund L.P. <ul><li>Non-Financial Assessments Program </li></ul>Does pushing SRI risk killing private equity deals? What is achievable?
  2. 2. Environmental, Social & Governance Assessments <ul><li>Fund managers are trustees and have a fiduciary duty to their beneficiaries ie their investors to achieve best possible returns and guard against loss of assets entrusted to them. </li></ul><ul><li>Environmental, Social and Governance Assessments provide extra risk mitigation in emerging markets -- traditional due diligence ignores market realities: </li></ul><ul><ul><li>Inadequate legal / regulatory framework </li></ul></ul><ul><ul><li>Poorly-drafted and –enforced laws leave room for corruption or just ignoring the law </li></ul></ul><ul><ul><li>Inability to enforce contractual rights </li></ul></ul><ul><ul><li>Inadequate reporting & registration systems </li></ul></ul><ul><ul><li>Opportunity to add value to clients/borrowers </li></ul></ul>
  3. 3. Traditional Investee Company Due Diligence <ul><li>Legal, financial business analysis </li></ul>Legal, Financial business
  4. 4. Due diligence should be broad based
  5. 5. Why should we bother? <ul><ul><li>Knowing whether the management of an investee company are good corporate citizens makes good business sense……. </li></ul></ul><ul><ul><li>If a company is violating labor laws, what else is it doing wrong? Violating environmental laws? Accounting fraud? </li></ul></ul><ul><ul><li>Fund managers and bankers are all fiduciaries and as such have legal responsibilities and hence liability risk </li></ul></ul><ul><ul><li>Official, media, shareholder and stakeholder scrutiny </li></ul></ul><ul><ul><li>Adoption of recognized international standards, enables companies to compete internationally </li></ul></ul><ul><ul><li>Encourages outside investment at the company level and in the stock market by mitigating risk….better to invest in, or lend to, a company with internationally recognized standards </li></ul></ul><ul><ul><li>The World is changing rapidly so get with it!! </li></ul></ul>
  6. 6. How does it work <ul><li>Fund managers taking a minority interest in a company can “push”, “pull” and “persuade” an investee company to adopt best practices </li></ul><ul><li>Proactive, pro-business approach to build trust and shareholder value NOT a policeman enforcing the law </li></ul><ul><li>Enlightened self-motivation by owners/management will fuel corporate development </li></ul><ul><li>Possible attractions to investee companies.. “ the ideal, the vision”: </li></ul><ul><ul><li>Higher productivity </li></ul></ul><ul><ul><li>Lowered costs (insurance, energy, etc.) </li></ul></ul><ul><ul><li>Better management, governance & controls </li></ul></ul><ul><ul><li>More competitive (”the others all have ISO . . .”) </li></ul></ul><ul><ul><li>Wider market (meet import regs, buyers’ codes) </li></ul></ul><ul><ul><li>If a listed company, higher multiples, better stock prices </li></ul></ul><ul><li>Environmental, social and governance assessments should be coordinated with financial due diligence at the outset </li></ul>
  7. 7. Results…the positives.. <ul><li>Effective pre-screening has resulted in 8 comprehensive non financial assessments with no major compliance issues. </li></ul><ul><li>All investees have minor compliance needs but generally ‘good corporate citizens’ in need of improving EHS management systems. </li></ul><ul><li>The legal regulatory framework in the region for EHS and labor, despite some gaps, is generally in good shape. </li></ul><ul><li>Non financial assessments are a cost effective Risk Mitigation tool….you can only manage the risks you know! </li></ul><ul><li>The main current driver ? </li></ul><ul><li>The massive buying power of the multi-nationals who have adopted standards that must be met as a condition of supply. </li></ul><ul><li>Future drivers in Asia? </li></ul><ul><li>SRI Index funds, Ethical funds, SRI and Governance funds all with an estimated appetite at over $4 billion for emerging market listed companies that meet their investment criteria. </li></ul><ul><li>Accounting and other standards. </li></ul>
  8. 8. In the commercial sphere, assessment use has grown exponentially: <ul><li>Commercial benefits: more sales & higher prices for companies who have adopted . . . </li></ul>1987 2002-3 ISO 9000: Quality Management ISO 14000: Environment OHSAS 18000 : Occ. Safety/Health Healthmark : Healthcare SA 8000 : Social Accountability Green Globe : Eco-Tourism GMP / SQF 2000 / HACCP: Food Safety BS 5750 British Standards Board (Procurement) ?????
  9. 9. In the “mainstream” investment world, this has taken the form of: <ul><li>New investment products: </li></ul><ul><ul><li>Indexes (e.g. DJ, FTSE) & screening of public companies </li></ul></ul><ul><ul><li>Ethical, SRI and Green funds </li></ul></ul><ul><ul><li>Governance funds </li></ul></ul><ul><ul><li>Social issue (e.g. Women’s) funds </li></ul></ul><ul><ul><li>Shariah-based funds and Islamic financing </li></ul></ul><ul><li>New risk management tools: </li></ul><ul><ul><li>Focus on environmental risks by insurers </li></ul></ul><ul><ul><li>Focus on corporate governance by institutional investors </li></ul></ul><ul><ul><li>Major commercial banks adopting the Equator Principles (World Bank environmental/social guidelines) for project finance </li></ul></ul>
  10. 10. ...the negatives! <ul><li>Risk of a private equity fund taking minority stakes losing deals as other lenders and investors are not doing non financial assessments. </li></ul><ul><li>Lack of environmental and labor experts who comprehend the needs of a private equity fund taking minority stakes. </li></ul><ul><li>A minority share holder has minimal influence to achieve much beyond compliance. </li></ul><ul><li>Companies unconvinced of gains from resource efficiency and see no correlation between better standards and higher multiples when listed. </li></ul><ul><li>Failure of the markets in Asia to adequately reward listed companies with good SRI and governance practices. </li></ul><ul><li>Failure of governments to price water and energy to reflect the real market price. </li></ul><ul><li>Countries often lack resources to effectively implement environmental, health, safety and labor laws. </li></ul><ul><li>Failure of pension funds, IFIs and bi-laterals to effectively implement their policies at the investee company level and recognize and facilitate market forces. </li></ul>
  11. 11. Difficult issues are sure to arise: <ul><ul><li>Firing an under aged 14-year-old worker may throw her entire family back into poverty </li></ul></ul><ul><ul><li>Can you have transparent accounting for all companies if the tax regime is corrupt? </li></ul></ul><ul><ul><li>What if demanding factory improvements beyond its peer group or national standards to meet ADB / World Bank standards would make an investee less profitable? </li></ul></ul><ul><ul><li>If all of a business’s competitors are paying below market rates for labor, should an investee pay more and not be competitive? </li></ul></ul>
  12. 12. But the risks of not doing anything are greater . . . <ul><li>Without assessments, non-financial risks cascade . . . </li></ul><ul><li>Child workers discovered in investee company factory! The immediate impact to the Fund: </li></ul><ul><ul><li>The investee company loses supply contract with major US buyer and cashflow & profits collapse </li></ul></ul><ul><ul><li>The investee company is fined, loses business license </li></ul></ul><ul><ul><li>Outstanding loans are called, security realized </li></ul></ul><ul><ul><li>The fund writes down its investment </li></ul></ul><ul><ul><li>The Fund manager and lenders suffer reputation damage and are probably in breach of their fiduciary responsibilities and </li></ul></ul><ul><ul><li>Are called to account, perhaps dismissed or even sued for negligence </li></ul></ul>
  13. 13. The unfortunate results . . . Nike/Wal-Mart Loan Book Own Pension Fund Treasury Wealth Management Institution Deposit- taking Insurance subsidiary Private Equity Guarantee Issuance
  14. 14. Conclusion: an integrated approach to due diligence facilitates risk mitigation and can lead to better financial results for the company and investors Workplace Health & Safety Environmental Management Productivity & Management Systems Financial Management Labor Governance & Controls

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