February 14, 2013
Interviewed by: David Snow
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ESG Success Stories: TPG, Carlyle Share Deal Details

How did TPG portfolio company Harrah’s Entertainment save $19 million per year on energy efficiencies? How did Carlyle portfolio company NBTY save $2 million per year on more efficient vitamin-production techniques? In the second of a two-part series, Edward Norton, Senior Advisor to TPG, Beth Lowery, Senior Advisor to TPG, and Bryan Corbett, Principal in the Executive Group of The Carlyle Group, share success stories where ESG principals of environmental, social and governance responsibility are deployed in portfolio companies. Also discussed: How to share “wins” across portfolio companies, a new, free resource provided to private equity firms by the Environmental Defense Fund (EDF), reporting, why even small private equity firms can realize savings via ESG programs, and what Norton learned during a visit to a Las Vegas casino.

(Click here to read a report on responsible investing from PwC. Click here to learn about an ESG “tool” for private equity firms developed by the Environmental Defense Fund.)

How did TPG portfolio company Harrah’s Entertainment save $19 million per year on energy efficiencies? How did Carlyle portfolio company NBTY save $2 million per year on more efficient vitamin-production techniques? In the second of a two-part series, Edward Norton, Senior Advisor to TPG, Beth Lowery, Senior Advisor to TPG, and Bryan Corbett, Principal in the Executive Group of The Carlyle Group, share success stories where ESG principals of environmental, social and governance responsibility are deployed in portfolio companies. Also discussed: How to share “wins” across portfolio companies, a new, free resource provided to private equity firms by the Environmental Defense Fund (EDF), reporting, why even small private equity firms can realize savings via ESG programs, and what Norton learned during a visit to a Las Vegas casino.

(Click here to read a report on responsible investing from PwC. Click here to learn about an ESG “tool” for private equity firms developed by the Environmental Defense Fund.)

David Snow, Privcap: Today we are joined by Bryan Corbett of the Carlyle Group, Ed Norton of TPG Capital, and Beth Lowery of TPG Capital. The best way to get a sense of the things that all you do and the platforms that your firms have built is to hear a few anecdotes. It’s one thing to talk in a high level way about adding value via ESG, but we’d love to hear about either some bullets dodged or situations where you’re able to step in and add value or control risk. Any stories come to mind? Maybe starting with Ed?

Beth Lowery, TPG Capital: He’s got lots of stories. Snow: Appropriate for our viewers?

Edward Norton, TPG Capital: I do have lots of stories, and I begin the stories in a way with a point that I made at the beginning that one of things that I found in coming to TPG and taking on a big job. I mean, TPG has a big portfolio just in the United States, and also in Europe and in Asia, and that portfolio embraces companies that are very different, and across different sectors, different geographies.

We have retail companies. We have energy companies. We have companies that virtually span all sectors. And they face very different issues with respect to environment, social, governance issue. So it’s a challenging task to get your mind wrapped around and then develop a strategy for addressing these issues across a portfolio.

But one of the immediate learnings that I had was that I was asked to come in and start this, but I found that we had portfolio companies who had really been thinking very systematically about this, and that embedded wisdom was a tremendous asset in undertaking this. One of those companies, somewhat counter-intuitively, really the first company that I dealt with extensively was Caesar’s, Harrah’s.

Snow: The casino?

Norton: The Casino company. And I remember literally within the first month that I was on board, I was asked by Gary Loveman, the CEO, to come down and really take a look at what Caesar’s was doing. And it was really an eye opening experience. I mean, among other attributes of Caesar’s, they’re a huge real estate. I mean, they have big buildings, consume a lot of energy. But Caesar’s had undertaken a whole series of steps– was just beginning a series of steps– to reduce energy consumption.

And I remember checking in at Caesar’s, and the desk clerk who checked me said, Mr. Norton, welcome. Are you down here on holiday or on business? Well, I’m actually here to work with your company. Well, really, what are you working on? I’m here to work on some of your environmental issues.

This was a 22-year-old, actually, African woman who said to me, oh, that’s our Code Green program. I said, well, you know about it? She said, oh, yes, I know all about it. I said, how do you know about it? She said, well, I’ve been to two seminars on it. I asked her, what does it consist of?

Well, our primary focus has been on energy efficiency. We teach all our housekeeping staff, when they go into a room, to turn up the thermostat. So people come to Las Vegas, they turn it down. They go in, they turn up the thermostat. They turn off the lights. That saves us a lot of money.

Well, she’s right. Saves them about $19 million a year. It’s real money. And Caesar had an across the board program of waste reduction, recycling of food, recycling of cooking oil. Tremendous program.

Same with a number of other companies that have done that. So, I think Caesar’s has won because it was the first one I met, but I could give you examples of a number of other companies who have started the same kind of programs.

Snow: Sounds like it was a much easier business trip than planned. They’d already had it all figured out. You could just relax.

Norton: And not only did they have it figured out, but one thing that we saw was that we could use Caesar’s experience to help inform our other portfolio companies, rather than trying to have every company reinvent the wheel. And when you have a company that is doing it, having the company send that message has an added power and credibility to just having the owner send that message.

Snow: Beth, any similar stories either from due diligence or from stepping into an existing portfolio company, and either discovering, recommending, or spreading an ESG best practice?

Lowery: I would say, as Ed was saying, we were pleasantly surprised to discover a lot of things within the portfolio. And we just had, as I mentioned, our sustainability leadership conference last week in New York, and bringing those companies together and having this sharing of best practices.

I think one of the best highlights there was looking at some of the waste issues and finding out there are a lot of common issues, even though you might have a Caesar’s with a Petco, with a J. Crew, and people say, well, we’re very different. Norwegian Cruise Line is very different than how you have to deal with your waste issues when you’re in a shopping mall.

And we discovered that there might be some opportunities for some of the portfolio companies to use the waste of some of our other portfolio companies as a source for what they’re doing in there. And so, if that plays out, that certainly would be a win-win for everyone. So, really trying to drive this cross-portfolio sharing, but also looking for opportunities to increase value.

Bryan Corbett, The Carlyle Group: Let me share just two anecdotes. The first would be on how get the right expertise to your companies. I’m not a long-time sustainability expert, and so for me, I needed to get up to speed on these issues, and I think what I learned is the importance of partnerships. And so, we formed a partnership early on with the Environmental Defense Fund to create a new due diligence framework called Eco ValueScreen that we apply to investments. So the idea is to, early in the investment life cycle, look at operational issues that can have a positive environmental impact.

Historically, private equity firms were very good looking at environmental liabilities and risk mitigation. We wanted to try and flip that so from day one, we were thinking about environmental opportunities. We worked with a company called NBTY, which is vitamin manufacturer. They make fish oil tablets and MET-Rx bars.

And we worked with them on this tool, and we identified about $2 million in annual savings that they could find just through some early, low hanging fruit opportunities, changing how they heat and cool their products, maybe changing some of their packaging. And that quickly became a case study that other companies could use. so we really relied on Environmental Defense Fund and other experts to help inform our process, and we try to make those experts available to our companies as well.

And the second anecdote would just be around reporting. I think a lot of PE firms are doing more and more in this area. I think a lot of our portfolio companies are active in this area. And trying to tell that narrative to the broader public, to the LPs, to other interested stakeholders, is increasingly an important part of ESG practices.

So we’ve for the last two years published a standalone corporate citizenship report that describes our activities. We will have more reporting next year on 2012, and I think having that transparency really helps to show the seriousness with which GPs are approaching ESG practices.

Snow: I’d like to talk about a sense of scale in the private equity industry. You have very large firms, like TPG and Carlyle, and then there are many, many medium and small size private equity firms all over the world who might watch this program and say, yeah, great. TPG and Carlyle can afford to have magnificent ESG programs, but how about me, middle market guy in Ohio? I can’t do anything. What can you suggest by way of smaller steps or less expensive ways that private equity firms can systematically realize value from sticking to ESG principles?

Lowery: I think even though we are large firms, we have very complex portfolios, so it breaks down into the sectors and individual companies, et cetera. So, I would suggest there are a lot of external resources that are available, and going through and looking at the basic steps for due diligence or some of the critical environment and social and governance issues.

And I also think it’s very important, as was mentioned, on partnerships and relationships, there’s a lot of third parties that are willing and want to work with private equity firms to really understand these issue. And getting that perspective really helps grow that expertise.

Snow: But aren’t they going to charge the firm for the service, and can a small to medium size firm afford that?

Corbett: For example, Environmental Defense Fund just this week put out a new management tool for GPs that helps them evaluate what they’re currently doing. Because oftentimes, GPs and portfolio companies are doing more than one would think.

So for example, EDF. It’s a free resource. They’re very interested in working with companies. And I would also say that even at Carlyle, we’re a bigger firm, but we didn’t start with our entire portfolio at one time. You start with a couple of companies where you think there’s opportunity, and then you build on that. Because the only way to get buy-in inside your organization is to have a few early wins that you can point to as successful precedents, so you don’t need to do all portfolio companies at one time.

And also, just because we’re bigger doesn’t mean it’s any easier for us. We have over 200 portfolio companies. Would it be easier if we only had five or six in our portfolio? Maybe. Maybe you have less resources, but you also have less companies.

So I think there’s a balance, and each PE firm needs to find their own right approach. There’s no right answer, as we talked about earlier.

Norton: I would also make the argument that private equity firms almost can’t afford not to do this because I think the opportunities for efficiencies, and cost savings, and more efficient deployment of energy and natural resources is really essential. I really also agree that there are many, many external partners, including organizations like the Environmental Defense Fund, who really want to engage on this and provide a tremendous amount of knowledge and leverage and ways to approach this. And there is the knowledge embedded within the portfolio.

And also increasingly, companies– let’s call them service providers– are willing to come in and look at a company and then get paid out of the savings so that the upfront costs are virtually nothing. That’s a very common arrangement now. On just taking energy alone, you will get people with a lot of expertise will come in, look at a company, and say we think you’ll save this money, pay us out of the savings.

Snow: It’s a commission.

Norton: Yeah, no capital investment.

Lowery: In the waste area as well.

Norton: And waste, same thing.

Lowery: But I do think it’s important that this doesn’t become– ESG or sustainability or whatever it’s called– that it’s this little piece over here that you have to find some extra money to do. It has to be part of the business. And so, integrating into the business and making your investment decisions. As you own a company, making sure they’re doing the right things, because it’s all about increasing the value of that company, and you cannot afford to ignore these issues.

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