ESG Evolves into a Core Strategy for Private Equity – BDO’s Spring 2022 Private Capital Pulse Survey

Anna St. Clair
The Bliss Group
(646) 576-4114
[email protected]

  • 50% of fund managers say they will direct the most capital toward setting up impact funds or investing in ESG target businesses

  • Assets are in high demand, but fund managers are less concerned that prices will continue to rise

  • Fund managers say the top challenge to closing deals is the gap between buyer and seller expectations

CHICAGO, JUN. 8, 2022 – Private equity fund managers are prioritizing impact funds and ESG above new deals, directing money to ESG commitments. According to BDO’s Spring 2022 Private Capital Pulse Survey, 50% say they will direct the most capital toward setting up impact funds or investing in targets with ESG-focused themes. This comes out well above the 14% who said they would direct the most capital to applying equity relief to portfolio companies and 12% who said they would direct the most capital to new deals.
This and other findings of the survey, which polled 200 U.S. private equity fund managers, underscore that the asset class has moved beyond tacking ESG initiatives onto their activities to fusing ESG with core fund strategy. The survey wasn’t designed to focus specifically on ESG, but across the questions BDO asked about deal making, value creation and exit planning, ESG emerged as a solid strategic underpinning that fund managers are pursuing: 99% say they have already identified an ESG strategy, with main objectives ranging from increasing value at exit to attracting and retaining talent.
“Limited partners and the public at large have been clamoring for ESG action, and funds are responding. As funds take a more hands-on approach to value creation, they become more than just a financial lifeline for their portfolio companies; they become a strategic partner, committed to the business’s long-term success: Among the fund managers who said they are raising an impact or ESG fund, 46% said their top post-M&A challenge was improving performance,” said Verenda Graham, Tax Partner and National Private Equity Practice Co-Leader. “Funds may choose to invest in companies that perform well on ESG metrics — and make them even better — or they may choose to partner with businesses where managers can leverage their ESG know-how to help portfolio companies improve their ESG posture.”

Where fund managers will direct the most capital in the next 6 months
Setting up impact funds and/or investing in targets with ESG focused themes 50%
Applying equity relief to portfolio companies 14%
New deals/investments 12%
Consolidating current portfolio companies in preparation for exit 11%
Add-on acquisitions/follow-on investments 8%
Investing in distressed businesses 6%

Higher asset prices, inflation and interest rate increases are some of the headwinds making value creation more challenging. Nearly half (47%) of fund managers identified performance improvement, reducing costs and enhancing revenue as their top post-M&A challenge, followed by operational improvements and realizing deal synergies, which tied for second place.

Top post-M&A challenges over the next 12 months
Performance improvement / reducing costs/enhancing revenue 47%
Operational improvements (order to cash, procure to pay, supply chain) 42%
Realizing deal synergies and transaction-related savings within allotted time / budget 42%
Technology/ERP integration and optimization 39%
Exit readiness/sell-side due diligence 30%
HR/culture integrations / return to office 27%
Tax optimization (tax strategy) 19%

Integrating ESG into due diligence, as stakeholder capitalism takes root

With the rise of stakeholder capitalism in recent years, the idea that businesses have a responsibility —not just to their shareholders, but also to their employees, customers, suppliers, societies and planet — is becoming a greater part of private equity leaders' mindset. More than one-third (38%) of fund managers say they are adopting and implementing an ESG strategy in order to “do their part” to address the threats of climate change.
The vast majority (95%) of fund managers are evaluating ESG criteria during due diligence: 54% perform a high-level assessment and 41% say they perform an in-depth assessment during their initial evaluation of a target. Less than 1% say they do not perform an ESG assessment. Amid a dynamic deal market, having a strong ESG strategy and value offering is emerging as a fundamental differentiator. When so many firms value ESG—and market themselves as ESG-focused—those that can execute an ESG strategy and deliver value for their portfolio companies and LPs will be the standouts.


Gaps between buyer and seller expectations and the future of asset prices

Beyond the industry shift to ESG, private equity has experienced a few turbulent years. Following pandemic disruption to business, 2021 saw record deal activity. Globally there were 8,548 deals worth US$2.1 trillion in 2021. That pace is expected to modulate in 2022 but gaps between buyer and seller expectations will remain a hurdle: 47% of fund managers said the gap between buyer and seller expectations is their top challenge to closing deals, up from 42% one year ago. For the previous two surveys, risk exposure uncovered during the due diligence process had remained the top challenge to closing deals.

Top challenges to closing deals
Gaps between buyer/seller valuation expectations 47%
Economic uncertainty 44%
Risk exposure uncovered during due diligence 43%
Lack of bandwidth among legacy and other vendors 39%
Increased competition from other buyers/investors 33%
Lack of quality deals being brought to market 29%
Lack of internal resources/bandwidth/talent 28%
Supply chain disruption 27%
Market consolidation 24%

“There has been a finite number of quality targets, which has intensified competition for assets,” said Matt Segal, Assurance Partner and National Private Equity Practice Co-Leader. “There are expectations that asset prices may come down amid inflation, rising interest rates and recession fears — that has played out in the first five months of 2022 as deal making slowed. This may begin to pivot buyer/seller dynamics to a buyer’s market, as more businesses contend with economic challenges and turn to private equity for relief. For fund managers, the challenge will be to offer an enticing value creation plan that can adapt to changing economic conditions.”

Asset Price Expectations
  Spring 2021 Survey Spring 2022 Survey
Rise 91% 76.5%
Stay the same 6% 16.5%
Come down 3% 7%

In this competitive environment, more than half (53%) of fund managers say strategics are their biggest competitor for deals. Strategic buyers are usually able to pay more for acquisitions and therefore may be pricing out private equity firms. Sovereign wealth funds were ranked the number two competitor, followed by other private equity firms.


Fund managers zero in on exit strategy

The pressure is on to show stellar exit results to LPs, to gain their interest in successor funds. Therefore, fund managers are thinking about their exit strategy earlier: 39% say they place more scrutiny on paths to exit during consideration of a potential target. During the holding period, fund managers recognize having a compelling ESG story — and the data to support it — is vital for landing a successful exit: 47% of fund managers say they are applying data analytics across the portfolio to better measure financial and operating performance.


Additional survey findings

  • Funds are experiencing workforce challenges and resource constraints. More than one-quarter (28%) of fund managers said lack of internal resources or bandwidth is a headwind to closing deals and 39% said lack of bandwidth among legacy or other vendors is a headwind to closing deals.

  • To combat shortages and talent competition, 61% of fund managers surveyed plan to hire more contractors and 55% plan to rely more heavily on automation and technology.

  • 49% say their main objective in developing an ESG strategy is to improve their ability to attract and retain talent across the portfolio.

  • Fund managers’ top three concerns about economic instability are: Regulatory changes; geopolitical/social instability; and unemployment rates and the availability of talent.

BDO’s Spring 2022 Private Capital Pulse Survey is a survey of 200 private equity fund managers at firms in the United States. The survey was conducted by Rabin Research Company, an independent marketing research firm, in March 2022. Download the full survey findings.


About BDO's Private Equity Practice 

Strategically focused and remarkably responsive, the experienced, multi-disciplinary partners and directors of BDO's Private Equity practice provide value-added assurance, tax and consulting services for all aspects of a fund's cycle, wherever private equity firms are investing.  


About BDO USA  

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax and advisory services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of skilled and committed professionals. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of more than 95,000 people working out of over 1,700 offices across 164 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: