Commitments to PE funds: good reputation an important criterion

Leadership quality, transparency and good corporate culture stand alongside returns – There is no way around ESG any more

When it comes to investments and shareholdings, figures such as profit and return are important factors – this also applies to private equity investments, funds that pension funds, life insurance companies or even sovereign wealth funds provide to financial investors. The capital is supposed to grow as the financial investors invest in successful companies and develop them further. Investment companies that perform well in increasing the value of their portfolio are correspondingly attractive to investors.

In the recent past, other factors have come more to the fore when it comes to assessing a private equity company ("confidence building"). So-called soft factors are gaining ground. According to a survey of 400 investment managers in Canada, the United States, the United Kingdom and Germany, it is no longer pure value growth in private equity funds that counts ("Beyond Investment Returns: What's Driving PE Perception with LPs in Germany?", Edelman Smithfield, February 2022). Reputation and credibility play an increasingly important role. According to the survey results, high leadership quality, transparency in all business processes as well as a healthy corporate culture make an important contribution to the selection of a PE fund manager. 80 percent of the surveyed investment professionals in Germany were of the opinion that a strong and experienced management team is important for a high level of trust. Almost as important (79 percent) were also transparent processes when assessing an investment fund. According to the survey, hardly three out of four investment professionals (74 percent) in Germany are guided by a fund's return alone when selecting a PE fund manager.

The results differ only gradually in the four countries. In Germany, a good reputation was mentioned as a selection criterion less frequently (70 percent) than on average in all four countries (81 percent).

The survey also showed that there is no way around paying attention to ESG criteria: More than one in three of those deciding whether to invest in a private equity fund say that the environmental footprint of a PE company is at least as important in the decision-making process as the return on investment. And even more: 32 percent of the decision-makers surveyed expect the portfolio companies of the PE companies to be managed according to the same ESG standards as the PE company itself.