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Private equity zones in on sustainability at mid-sized companies

<p>The Environmental Defense Fund aims to find environmental -- and financial -- opportunities at smaller companies with a new program for private equity firms.</p>

Dave and Buster's may not give off an environmentally friendly vibe with its video-game-packed restaurant-arcades, but through a new program aimed at medium-sized businesses, it's on its way to making those locations run more efficiently.

The entertainment company is part of private equity firm Oak Hill Capital Partner's investment portfolio, one of three companies that stood out when Oak Hill began looking at environmental improvements.

Non-profit Environmental Defense Fund (EDF) worked with Oak Hill to create a methodology for analyzing middle-market portfolio companies -- Oak Hill's specialty -- to find where environmental changes can be made along with financial opportunities.

The goal is to do for middle-market companies what EDF has done for larger companies though similar work with private equity firms Kohlberg Kravis Roberts & Co. (KKR) and The Carlyle Group.

"Going back to 2008, we have worked with private equity firms to help them find and unlock opportunities, save energy, reduce waste," said Tom Murray, managing director of EDF’s corporate partnerships program, "By doing this, they build stronger businesses and provide returns for their investors."

The impetus for these types of programs, Murray said, comes from two places. "First is the realization that leadership on environmental management can create significant financial benefits for their portfolio companies and their investors," he said. "Second is, institutional investors have become increasingly focused on environmental, social and governance management, and are increasingly asking private equity firms they invest in for greater reporting and transparency on how they are managing those issues."

EDF and Oak Hill started working together with the aim of showing that benefits exist for private equity firms that invest in small or medium-sized companies.

"The process is basically an effort to map portfolios on three metrics," Murray said. Oak Hill looked at environmental performance, financial opportunities, and management readiness or potential for success.

Three companies, Murray said, bubbled up: Dave and Buster's, which has nearly 60 locations in the U.S.; Jacobsen Companies, a transportation and logistics firm; and ViaWest, one of the largest privately held data center, cloud computing and managed service providers in North America.

Environmental programs that have been implemented at some of their locations focus on lighting, climate controls and other operations that traditionally consume large amounts of energy. The pilot programs implemented found more than $700,000 in annual energy cost savings with associated carbon dioxide emissions reductions of 2,900 metric tons.

"In the Oak Hill portfolio, these companies represented scale," Murray said. "When we talk to all kinds of companies, it's widely known that energy efficiency initiatives make good business sense, but they're not always being implemented. In some ways, it's like flossing your teeth."

Meaning, you know it's good for you, you know you should be doing it, but you aren't always doing it all the time.

"We find that there are lots of barriers to doing energy efficiency at the scale it should be done," Murray said.

The methodology EDF and Oak Hill worked on can help overcome those barriers. And in particular, private equity firms hold a number of advantages to getting programs in place, Murray said.

Private equity firms have large stakes in companies, typically take an ownership stake for five to seven years, and work closely with companies' management teams, Murray said. All that combined gives them the long-term view, leverage and impetus to find environmental and financial savings and make changes.

"The portfolio companies are certainly the ones doing the implementation," Murray said, "But what the private equity firms can do as owners of the companies is provide clear guidance, support and resources to make sure they're focusing on the right opportunities, they have what they need, and holding them accountable for achieving the right targets and goals."

Photo of a new business perspective provided by Gorillaimages via Shutterstock.   

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