Regulating away from trouble

There is a general view that LP appetite has dwindled and, along with it, the number of relationships maintained with fund managers. Do you agree?

It is true that there is a trend towards a reduction in the number of relationships, but we believe that we are coming to a turning point. More investors are now considering going back to the market and allocating money to private equity and this capital will need to find its way into funds. In our case we have noticed an increased willingness by fund managers to adhere to the Robeco Principles for Responsible Private Equity. Guidelines for responsible investing are now a salient issue on the industry's agenda: appetite for products adhering to these principles is increasing on the investor side, as is a willingness to subscribe to the principles on the fund manager side. There is therefore a larger pool of fund managers from which to choose. Our new vehicle will invest in approximately 20-30 funds, comprising both new names and fund managers we invested in with our first sustainable fund.

How has Robeco's approach to investing changed in recent months?

Part of the due diligence process we undertake is based on a dialogue with the fund managers regarding adherence to responsible investment principles. Through this engagement process, both pre-investment and post-investment, we discuss with managers the possible actions related to the management and implementation of environmental, social and governance (ESG) issues. Fund managers commit themselves by subscribing to the Robeco Principles for Responsible Private Equity to implement ESG criteria in their investment policies and ownership practices, and to stimulate their underlying portfolio companies to adhere to ESG standards, such as the UN Global Compact. Annual progress reports on the private equity fund's ESG efforts are also part of the deal, as is their responsibility to share their experiences and lessons learnt with Robeco and other interested parties in order to continue to improve responsible investment practices within the private equity sector.

We will continue to invest primarily in buyout funds focusing on the mid-market, with a smaller allocation to investments in large buyouts and venture funds. In addition, we'll stay away from certain pre-defined negative sectors, such as gambling, tobacco and weapons, which it goes without saying are not in accordance with responsible investment guidelines.

Do you see a shift in the power balance between LPs and GPs?

There has been much talk in the industry when it comes to a decrease of management fees, carry and hurdle, but I don't see there being any significant changes. In this sense, both investors and fund managers must appreciate that the relationship is like a pendulum swinging back and forth. It is wiser for both sides to maintain an amicable equilibrium if relationships are to be successfully maintained.

On the issue of regulation: do you think a more widespread adherence by LPs and GPs to the UN Responsible Investment Principles would appease regulators?

There is increased urgency from the political scene to tighten the leash on private equity, which has (wrongfully) been blamed, at least partially, for the state of the world financial system. In this sense, responsible investment principles would present a solution. They could potentially calm regulators and allow the industry to self-regulate, which is always a better solution than imposed regulation. In terms of big/mega funds, houses like Apax, Bain, Carlyle, KKR, Permira and TPG - all members of the Private Equity Council - have all already adopted a set of comprehensive responsible investment guidelines.

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