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Case Studies

A selection of case studies covering the key components of a responsible investment (RI) management framework, both at house level and throughout the deal cycle.

House level case study:
NorthEdge Capital


NorthEdge Capital

Background

NorthEdge Capital is firmly committed to the responsible investment agenda and has consequently established and structured a strong approach to integrating ESG factors into its investment processes, decision making and ownership practices. The firm’s approach is underpinned by its responsible investment policy which drives pre-deal screening of new investment opportunities and post-deal ESG monitoring, analytics and improvement. To ensure a sound implementation of its policy, all staff receive ESG induction training.

The firm aims to align its activities with relevant national and international standards. NorthEdge has therefore been a signatory to the UN Principles for Responsible Investment since 2013 and is now ranked “A” (top category) for strategy, governance, application and monitoring by the PRI. The firm has also adopted the UN Global Compact into its new investment screening process.

Approach

NorthEdge operates an in-house developed ESG monitoring tool across its entire portfolio: the ESG Analytics App. The firm requires all its portfolio companies to define annual ESG objectives, then monitor and report their progress on an annual basis, using the app.

Performance information is therefore collected on a set of specific ESG factors, material to each portfolio company, allowing targeted and efficient monitoring. As a necessarily bespoke tool across a varied portfolio, NorthEdge retains consistent analysis across portfolio companies, notably by measuring quantitative metrics such as employee churn. In addition, NorthEdge considers that the following three ESG factors are common across its portfolio and therefore requires all its portfolio companies to report associated data:

  • Employees, especially job creation and talent development;

  • Governance, especially business ethics, bribery, corruption, transparency and overriding ESG approach; and

  • Supply Chain Sustainability.

The ESG Analytics App has been developed with the benefit of third party research, as well as input from Manchester Business School, and is refreshed annually to ensure the tool positively evolves over time.

Building on the ESG information monitored, NorthEdge provides its investors with quarterly ESG updates as well as a more detailed annual review of ESG activities.

Rationale

NorthEdge’s mission is to help realise the potential of portfolio companies, management teams and employees, in order to enable sustainable shareholder value creation.

We believe that effective assessment and management of ESG makes a positive contribution toward this effort, meaning that responsible investment is perfectly aligned with our core business strategy.

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Pre-investment case study:
3i


3i

Background

“Responsibility” is a key feature of 3i’s corporate values, with Responsible Investing being an integral part of their core investment policy.

Pre-investment is the first opportunity in the investment lifecycle for 3i to actively consider and action ESG components. 3i employ a detailed due diligence process across its Private Equity and Infrastructure investment businesses.

Approach

3i’s Responsible Investment Policy requires that, at the initial stage in the investment process, all new potential investment opportunities are screened against 3i’s “exclusion and referral” lists, which identify businesses and activities in which 3i will not invest and those which are particularly sensitive or potentially involve material reputational issues and may necessitate more in-depth due diligence or risk assessment. In appropriate cases, new potential investments are additionally assessed against the IFC Performance Standards.

Once a potential investment opportunity has progressed to a more advanced stage in the investment process, a high-level assessment is carried out to (i) identify potential material ESG risks and opportunities (ii) recommend areas for more detailed due diligence pre-investment and improvement areas to focus on post-investment. A specialist external firm undertakes the high-level assessments for 3i’s Private Equity team across Europe and North America – they work closely with the 3i investment team to understand the target business and the 3i investment case in order to focus on the most relevant risks and opportunities. A copy of the subsequent summary report forms part of the investment committee papers.

If potential ESG risks are identified in the high-level assessment, 3i commissions “deep dive” due diligence involving external experts. If the diligence identifies material ESG risks, 3i may require the company to commit to implementing appropriate measures to mitigate those risks. Such measures may include meeting relevant International Standards (over a reasonable timeframe). 3i will support the company by developing action plans with appropriate targets, timetables and resources.

Where appropriate, conditions are inserted into the investment agreement and relevant actions are addressed in the 180 day post-investment plan.

Following completion of the investment, an independent ESG review of each investment process is completed by an external consultant, with the following outputs:

  • An evaluation of the ESG due diligence conducted and the 180 day plan;

  • A report of the material ESG risks and opportunities impacting the investment; and

  • A completed ESG questionnaire which 3i then uses for ongoing portfolio monitoring purposes.
Rationale

3i believes that incorporating ESG matters into their pre-investment approach makes sound business sense because not only does this reduce risk, but it also helps identify potential opportunities to add value to the company and to generate wider benefits to stakeholders.

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Hold period case study:
Graphite Capital


Graphite Capital

Background

Explore Learning (backed by Graphite Capital) is a maths and English tuition provider with centres in the UK and US, working with children of mixed abilities between the ages of 4 and 14.

Approach

View their approach in the video case study below.

Explore Learning & Graphite Capital

Rationale

Following Graphite’s investment, ESG is now at the top of the board’s agenda with the company focusing on new areas of ESG, with costs incurred outweighed by the performance and value benefits.

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Exit case study: Selection Services (Palatine Private Equity)


Palatine Private Equity

Background

Hold Period:
Acquired by Palatine PE in December 2011; following successful buy and build and organic growth development revenues built from an initial £28m to £40m at the time of exit in January 2016.

About:
Selection Services (Selection) provided managed IT services to public and private sector clients, specialising in scalable, virtual IT systems and environments. For many clients this involved moving to cloud computing systems for the first time, supported by Selection’s expert system design, data storage and user-friendly maintenance services to achieve efficiencies, better online customer interface, data security and business continuity assurance.

Selection employed over 400 staff based at its Bromley offices and a team of field engineers across the UK, including many technical roles and key client relationship managers - meaning that staff engagement and retention was very important for business success.

Approach

ESG process
An expert ESG baseline review was undertaken on behalf of Palatine shortly after investment to identify understanding and performance across a wide range of ESG matters, highlighting not only areas of weakness and potential risk but also opportunities to add value to the business by making ESG and sustainability integral to its strategy and operations.

Change and Transformation

Corporate culture:
Senior management recognised more could be done to establish a stronger company mission and values that staff could buy into, and, if well designed, lead to consistently better customer service. A new HR strategy was the first step, aimed at becoming a best in class employer. The strategy included the ‘Selection Cultural Imperative’ initiative which introduced ‘Business Foundation’ workshops for service development and engaged employees in developing a fresh set of company values. Addressing the remaining ESG issues, efficiencies and opportunities systematically, as described below, demonstrated the company was living its new values.

Governance, risk and ethics:
Governance processes were formalised at investment, and the ESG review highlighted lack of Board gender diversity as an issue and that risk identification needed to be extended. A Head of ISO Compliance & Risk role was subsequently created to drive standards higher, and develop new, wider ranging risk identification and compliance methods. A Policy and sustainability KPIs also helped to de-risk purchasing. Appointment of a woman to the Board remained a longer term goal at exit, though by now on the agenda, recognising there was a significant amount of female talent at the Operations Board level.

Health & Safety:
Although operating a documented H&S system, some weaknesses identified pre-deal and in the ESG review led to the new Head of ISO Compliance & Risk being assigned H&S responsibility and subsequently professionalising the system and culture. Risk management in areas such as field and lone working were addressed, as well as office environments for better wellbeing.

Customer care:
Clients depended on Selection for data security, business continuity and many aspects of their own customer service, so marketplace responsibility and customer care was core to the business model. Maintaining a series of specialist ISO certificates was crucial to this, but in addition Selection’s ‘Business Foundation’ training engaged its teams in developing in-house standards and methods for delivering the highest levels of customer service to win competitive edge. Selection was later able to win highly sought-after government framework contracts, having passed stringent admission tests.

Carbon, emissions and natural resources:
A proactive Carbon Management Plan created savings in emissions and costs through energy monitoring, reducing the number of data centres rented, and fuel efficiency in the engineer fleet using vehicle choice, driver training, better route planning and GPS tracking - this was also better for the drivers. A car pool and cycle to work scheme added to the company green travel planning while introducing ‘smart’ office technologies resulted in considerable resource savings. Selection was consolidating its approach in this area by aiming for internationally accredited systems in environmental and energy management (ISOs 14001:2004 and 50001:2011 respectively) at exit.

Community:
The employee team were enabled to choose and manage new community outreach schemes, replacing the previous ad hoc, top down approach. Projects were consequently more meaningful to the staff, such as mentoring in local schools and colleges.

Rationale

Selection was typical of many good companies that have grown quite rapidly beyond being an SME without having the time or capacity to step back and assess where the company approach could be further professionalised, and where it could excel, especially in terms of looking after its greatest assets such as employees, customer loyalty and reputation. Palatine’s strong focus on ESG and expert review mechanisms gave the company the impetus to concentrate on what really mattered to business success, where investment needed to be made, and where a range of incremental gains could be made. This was picked up very strategically by the Board and senior management and implemented with attention to quality, with the effect that the business had less unmanaged risk, unknown risks, and far more long term added value at exit than at entry.

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