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From Our Blog: Due Diligence: Environmental Management Can Increase Returns for PE Firms

ALL POSTS | RSSPosted: 11/19/2009

A few months ago, I was faced with an interesting situation: I had a shiny new MBA from MIT Sloan and a job offer from McKinsey, but my start date wasn t until January. These unusual circumstances presented a unique opportunity to pursue a personal goal of using my business background to achieve tangible environmental results.

Long an admirer of EDF s practical approach to solving problems through corporate partnerships, I jumped at the chance to take on an externship with the Green Portfolio Project team as they worked to replicate the early success of their partnership with KKR.

As EDF and KKR s Green Portfolio Project has proven, sound environmental management can provide a substantial source of value creation for private equity firms and their portfolio companies. So far, that project has focused on identifying and implementing environmental initiatives at companies PE firms already own.

However, by considering environmental management during the due diligence process, private equity firms could identify similar cost saving opportunities in the companies they are looking to buy. The current focus of environmental due diligence is aimed primarily at risk mitigation. By considering environmental initiatives early on in the process, a PE firm might be able to identify a few million dollars in operational savings, which could influence bid prices.

For example, if the PE firm recognized an opportunity for a fleet efficiency project, the resulting decrease in operational expenses would lead to an increase in cash flow, allowing the PE firm to pay down debt more quickly and realize a higher sales price upon exit. Once the deal is consummated, the private equity firm could add the environmental cost saving projects identified during the due diligence process to the hundred-day operational improvement plan.

By looking at environmental management as a way to add value, not just mitigate risk, PE firms can improve their due diligence process and deliver better returns to their investors.

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