By Ken Mehlman, Robert W. Antablin Dec 14, 2018
Recent reports and headlines have confirmed what we’ve learned over the past 10 years – the scale of the world’s social and environmental problems can’t be solved by government and philanthropic spending alone. Private capital can and must play a role. Investing behind the right themes, investors have an opportunity to ‘do well by doing good.’
This is why we have come together to form KKR Global Impact, a team of investment and sustainability professionals dedicated to investing in businesses that can produce positive financial returns and address key environmental, social, and governance (ESG) challenges.
We know that there has been much debate about how institutional investor capital will be put to work as part of the impact investing movement. We welcome these and other questions, and hope to engage in an ongoing dialogue with those inside and outside the impact investing community.
To kick off that dialogue, we would like to share five of the most common questions we have received about KKR Global Impact as well as our responses. We welcome the opportunity to continue the conversation with you. We don’t have all of the answers, but we have a strong desire to find opportunities to become part of the solution.
Ken Mehlman & Robert Antablin
1. Why did KKR decide now is the time to get into impact investing?
Trick question! KKR has been investing in companies that help provide solutions for more than a decade. In that time period, we have invested $4.8 billion across 31 portfolio companies representing a range of different sectors that we believe address one or more of the UN’s Sustainable Development Goals (SDGs). Over this same time period, we have also worked hard to protect or enhance value by considering ESG issues across all of our private equity investments so they’re operating more responsibly. For example, we have emphasized improving environmental performance at over 50 KKR portfolio companies. In the first 25 companies, this generated $1.2 billion of cumulative financial impact. We’ve hired 62,500 veterans at KKR portfolio companies. We’ve evaluated responsible sourcing practices at 26 companies and, this year we are sharing best practices around privacy for companies that possess data, and also diversity, inclusion, and respect in the workplace.
The formation of KKR Global Impact reflects the view that we, and the impact community, have had for many years – that there are compelling investment opportunities in sustainable businesses. Our history and experience convince us that we can do much more, particularly in the lower-middle market. By creating a dedicated team, we are better positioned to identify great opportunities and help these sustainable businesses grow.
2. What is unique or different about KKR’s approach to impact investing?
With more than 40 years of investing experience across multiple alternative asset classes, we believe that we have the intellectual and financial capital to contribute to the impact investment movement. We have honed our approach over the years and we believe we now have the right mix of industry expertise, investment acumen and, importantly, capital to execute on our investment thesis. We approach this opportunity with humility and appreciation for the hard work of the impact pioneers who laid the groundwork necessary for capital to begin forming around the opportunity set. We hope to learn from, and partner with, the impact community in many ways.
While we are far from the only investment firm engaged in impact investing, we are focused on a corner of the market that we believe has been underserved. Specifically, the lower-middle-market private equity opportunity set. In particular, we are focused on opportunities to invest behind proven business models that we can enhance in active partnership with our management teams -- situations where more capital, better incentives and improved business processes can enhance the quality of an existing solution, and scale the economics and impact in tandem.
We are focused on the global opportunity set across the North America, Europe and Asia, leveraging the footprint and scale of the KKR organization. In this regard, we believe that it is critical that we execute by combining a global and a local approach, actively partnering with our colleagues within key markets to leverage our local connectivity and deliver better outcomes.
3. How does KKR measure the impact of its investments?
We get this question often and think it’s critical. What you choose to measure, you are much more likely to manage and optimize. Determining the right metrics can ensure that we optimize our impact and mitigate the negative externalities of our investments. Also we want to enable others to learn from our successes and failures, just as we hope to learn from theirs. This is why we are thinking about impact in a few different ways.
First, we know that a lot of hard work has been done to think about the best way to define, measure, and track impact, so we work to learn from and leverage third-party frameworks to the extent possible.
Second, we worked to develop a definition of impact aligned with financial outcomes. The companies in which we invest must have a business model that contributes in a measurable way to the SDGs, such as promoting energy efficiency, reducing waste, or building more resilient infrastructure. This will align maximizing impact with our ability to help the company grow. The more product or service these companies sell, the more our investment will grow.
Third, we have partnered with Business for Social Responsibility (BSR), a global nonprofit organization focused on making companies more sustainable. BSR will provide an external perspective and strategic insights to support our efforts to define, measure, optimize, and communicate positive impact across our key investment themes. They will also help us ensure we are focused on operating our portfolio companies in the most responsible way - mitigating potential negative impacts associated with our companies, and optimizing their ESG performance. Here too we will use a third-party framework—the Sustainability Accounting Standards Board (SASB) standards—and add some cross-portfolio areas of focus like diversity. And again, our goal—like with impact—is to measure in a way that drives outcomes—in this case, improving ESG performance over the life of the investment.
BSR has been a critical partner in much of our work to improve ESG performance over the past eight years, and we appreciate the constructive partnership that we have developed for KKR Global Impact.
Finally, we intend to utilize independent assurance using objective and experienced third-party auditors to support our work.
We make no proclamations that our measurement approach is unique. Instead, what we’ve done is build on all of the great work by organizations like BSR, SASB, Global Reporting Initiative, the UN Principles for Responsible Investment, and many, many others to develop a measurement framework that we think works for us and works for our investors.
4. What about Barghest Building Performance (BBP) made it attractive as an impact investment?
BBP is a Singapore-based company that has developed a proprietary solution designed to deliver consistent energy savings for Heating, Ventilation and Air Conditioning (HVAC) systems in commercial and industrial buildings. In evaluating the company, we discovered that BBP’s energy efficiency solution has the ability to deliver the same cooling load to sites while consuming up to 40% less energy.
BBP’s business directly addresses two SDGs - #7 (“Affordable and Clean Energy”) and #9 (“Industry, Innovation and Infrastructure”). From an impact perspective, it is clear that BBP can play a role in promoting a sustainable world. However, what really excites us about BBP, is the opportunity that we see to scale the business. We believe that BBP has a first-mover advantage in Asia and is positioned to deliver differentiated solutions that allow industrial companies to reduce costs simultaneously while operating more sustainably. We love finding opportunities such as this, which feel like win-wins.
5. What’s next for KKR Global Impact?
We have a deep pipeline of potential investments that specialize in one or more of our target sectors, which include: Industrial & Infrastructure Solutions, Environmental Management, Next Generation Energy, Responsible Production & Consumption, and Learning Resources & Workforce Development. Collectively, we estimate there is a $10 trillion investment opportunity in these sectors1. We can’t meet this gap in funding alone, and we hope that our experience (and even our failures) can help drive additional focus and bring capital off the sidelines to deliver progress against the SDGs.
Until then, our goal is to identify, invest in, and support the success of companies delivering on the dual opportunity to deliver financial returns and positive impact. To learn more, please visit our website or follow the conversation at #KKRGlobalImpact.
1 Source: Business & Sustainable Development Commission, report titled ‘Better Business Better World’, January 2017. Includes market opportunity for “Food and Agriculture,” “Cities,” “Energy and Materials,” and excludes market opportunity for “Health and Wellbeing” ($1.8T).