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Winna Brown

You're listening to the EY NextWave Private Equity podcast. I'm Winna Brown and I'm your host.

ESG [environmental, social and governance] is top of mind for PE executives right now. According to the 2022 EY Global Private Equity Survey, ESG is one of the top 4 strategic priorities listed by PE firms. In fact, 42% of the largest fund managers seriously consider ESG in their decision-making process, while a further 39% say they consider ESG issues seriously in certain risk areas. The data is clear. ESG is a top priority for firms. But the question remains: how can they effectively implement ESG strategies and principles across their entire portfolios? Today, I'm delighted to be joined by Maha Eltobgy, Chief Sustainability Officer and Managing Director at Brightstar Capital Partners. In this episode, we're going to explore the approach that Brightstar is taking to implement ESG on the ground and advise on how operating partners can navigate challenges in communicating the value proposition of ESG at the portco [portfolio company] level.

So Maha, how would you describe your approach to implementing Brightstar ESG priorities in your portfolio companies?

Maha Eltobgy

With our approach, it’s hands-on and operationally intensive with everything that we do. You know, we really roll up our sleeves and we work very closely with our companies. We work with them and we partner with them in identifying transformative operational initiatives, as well as the levers we can pull to optimize their performance and the performance of the business and how they generate value over the long term. We do that both for traditional, what would be considered operational considerations, as well as for ESG-type factors.

Brown

So, when I think about that and I think about traditional private equity investment, you know, the portfolio companies that you invest in would absolutely expect you to come in and roll up your sleeves and focus on operational matters. But when we think about ESG and ESG being, you know, relatively new, how have you found those reactions? I mean, have the companies kind of been really resistant, or have they been really open to the actions that you're trying to take in the portfolio companies to really drive ESG principles?

Eltobgy

You know Winna, I think, the stock answer here would be everybody knows how important this is. And they welcome me with open arms, right? But you know, the truth is much more nuanced, especially but not only in the segment we operate, right. These are successful companies, small- to medium-sized businesses, where the founders and management teams are really focused on the day-to-day of their business. So, you know, we come in and we bring perspective, and we partner with the teams for them to understand why ESG factors can be important to their business. You know, it's not easy, but it's how we go about working with them. It works well with our operational focus. I'll give you an example, but also to put it in context, one of the considerations we have right now and that we're really assessing is this balance between being top-down and entirely bottom-up. And I think it can be a bit challenging, right? Like we can go in and say we want to collect all these metrics and impose it on companies, but if they don't understand why they're doing it, why it's important to their business, it's going to be very difficult for us to make that meaningful. And, you know, to be frank, we struggle a little bit with the pillar that seems to be most developed, which is the E in environment pillar, because many of our companies don't have a huge impact on the environment nor are they very affected by climate change. But still, we recognize it's important. So, we're going to go about developing that capacity and understanding.

Brown

Yeah. You know, it's interesting, as you were sharing that with me, it made me think of a perspective that actually one of your colleagues shared with me. And what he said was, as a PE firm, you're sitting in New York or wherever your headquarters are and you're thinking conceptually about ESG, and you're thinking, well, it's all pretty straightforward and it should be easy to implement. But the reality on the ground, as you've just described, is very different. And so, I'd love for you to bring that to life for us and share with us some of the real challenges you felt with the portfolio companies. How do you bring to life the imperative around, using your example, climate change? What are some of the conversations you've had and how have you brought them along on the journey?

Eltobgy

We're not going to give you an example, and I'll veer a little bit from climate, but I'll come back to it. In December 2020, we bought a business called Amerit Fleet Solutions and Amerit employees — 1,500-plus technicians who provide fleet maintenance to all the large corporates, many of whom delivered packages to your door every day or engaged in some form of moving product around the country. When we bought the company, one of their key issues was that they were experiencing very high turnover for their tax. They understood what that meant for their bottom line, but they didn't think of it as an ESG issue. It's part and parcel of their business. It's truly a business issue.

So for Brightstar, our ethos is really about relationships and shared interests, right? We pride very much on our relationship-based model. So, the people pillar is extremely important to us. And it's often the first pillar; when we start engaging with companies on ESG, it is the first thing that we look at — the human resource practices. And so, in looking at their turnover and the issues that they have with turnover, we basically broke it down into recruiting, retention and engagement, and really working with the team there to really analyze how they go about recruiting tax. Where are they going? How do they do it? The metrics that they're using. What are they doing to retain the technicians? How engaged is their workforce? We did an employee engagement survey. We learned a lot from that. That actually led us to working with the board and putting together an entire ESG pilot for Amerit. And this really fits in with, they have a whole strategy around this notion of reimagining Amerit called Amerit reimagined. So, we've looked at ESG. I'll start with G, because I actually think governance is the underpinning of everything that we look at here. And look, there's a lot that's been written about PE, having a good governance model in terms of the alignment of interests between the general partner and the management of the companies that we invest in. One of the things that we do as soon as we go into a new relationship is that we work with the owners and the management team on one, they roll over a significant portion of their equity into the business, so they are fully aligned with us for the next exit. The second thing is, is that we work with them to expand ownership. We go beyond the first tier and then to the second tier within the organization, which in some cases was the first time the family or the ownership team had ever expanded ownership in the business beyond that top tier. So that's something that we pride ourselves on. There's a whole movement around it now, you know, with the ownership works. We're assessing that very closely and looking at what can we do even further, even more than what we do right now. But we think we're in a good place. And then one of the things that we're doing, I've developed a relationship with Robert Eccles, who you probably know is a professor of Oxford, but very much a guru around ESG. And he's very focused on purpose. And he's written a lot about, like, every company should have a purpose statement. So, we've been working with our management team at Amerit for them to define what's the purpose of Amerit solutions. It really does focus the team on what they're doing, and it allows them to communicate to everyone down the chain. What's our strategy? What do we stand for? And one of the things that we learned from the employee engagement survey is a number of our techs didn't feel like they knew what the firm stood for. So, there's a whole piece around engagement that once you've done your baseline — we've benchmarked our salaries and our benefits and all the other things — what is it then that keeps people happy at work? And I think that's really important, not just as a result of COVID-19, but just ongoing and maybe it's become more pronounced during these COVID-19 years. When we look at environment, this is where we saw opportunity for value creation. A lot of our largest customers are starting to think about EV [electric vehicle]. And so, we went far down the road of, alright, well we need to develop an EV strategy so that we can meet our customers where they are. We can also train our technicians, so they go from becoming simply mechanics essentially to, in some cases, software engineers, because EV is a whole different. So that's value additive for our technicians as well. That's something we've invested a lot in as part of the Amerit strategy. But we have mobile service centers. They are emitters. So, one of the other things that we're looking at is, okay, we need to benchmark at least our scope one and scope two greenhouse gas emissions. We're not there yet. We're assessing how to do that. We will and want to do that. And we want to be able to, once we have that baseline, reduce our impact on the environment through these mobile service centers. We've also, Amerit has also applied for a grant from the state of California, where the company is based, for 15 EV trucks, our own trucks. So, we're also looking at transitioning our mobile units from combustion engines basically to EVs. And then, you know, we talked obviously a lot about the people pillar, which is how we started all of this at Amerit. I could go on and on. Obviously, technicians are predominantly male, really thinking about how to be more diverse within the company. We're really trying to tackle this from every lever. And then finally, we do all of this really to meet our customers also where they are. We want to be the best partner to our customers. A number of our largest customers have made net-zero commitments. They have commitments around diversity in their supply chains. And so, our ESG strategy has an ESG plus a C, because customers are extremely important for us.

Brown

You know, I love this example. And if I could just share back, what I heard is when you acquire a company and you make an investment, it really is hand-in-glove working together, and you try to take business issues and translate them or connect the dots to ESG issues, and that's how you gain their trust. So in this case, you know, employee retention, as the example, once you gain their trust in you as to your point, you bring it down, right? It's not just the top level. You bring it down to the lower levels and you bring everyone on that journey. They can then see the value very easily of retaining the people, upskilling the people and people start staying. You know, I find that really a clever, easy first step, if you will, to really bring everyone on the journey as you take the other steps.

What I did find really interesting is how you translated that to purpose, which I find others, a lot of people talk about purpose, but this is a great example of how purpose can underpin the success of a company because it brings everyone within the company rowing in the same direction. And oftentimes when you talk about ESG, there's a lot of focus on the specific, you know, DEI [diversity, equity, and inclusion] or carbon-based lining. But what underpins everything about ESG is the purpose of the company. When you have that as that thread, it changes the conversation. It brings it to a whole new level. I love that example.

Eltobgy

Winna, I really appreciate it. Look, there's a balance between value and values. Oftentimes, people confuse the two. ESG is not entirely about values. In a lot of ways, it's about value. But of course, everything underpins your purpose, how you operate as a responsible business in a community. So, there is some values notion in there. But you asked about some of the challenges. And I think, reflecting upon that question, a number of the companies that we work with, for them, ESG isn't really a term that they're familiar with. It's not because they don't care or they're not active, or they're not even doing parts of it. It's just that it's not the construct of how they think. You know, they're not going to conferences or listening to podcasts where this is a big issue, but they do fundamentally understand what's important for their business and how their business can generate value. And I think people are also really starting to understand license to operate in kind of a more fundamental way. Now, our businesses are not consumer facing. So oftentimes, the license to operate comes from consumer reaction, backlash, whatever you want to call it, or maybe it can be more positive. It's just consumer demand; it drives companies in a certain direction, but our customers obviously feel some of that. And so, we recognize and our companies recognize what that means. You know, there's a whole other area that you can loosely lump into a business environment or culture. We operate in some sectors that are quite male dominated, some of the parts of the country that are less diverse. Once we win people's trust, we can delve into those topics. I'm always amazed. I've worked a lot on the issue of women in asset management in my prior job, and I was at the World Economic Forum, and I'm still amazed at how much we have to make the case for women and asset management. And this is among very educated people, right? So, if you extrapolate from that across sectors, across the country, once you win people's trust on one thing, you can make the case for many other things.

Brown

And also, to your point, there is when you make the case on one thing and you can demonstrate the value that is derived from going down this path and instilling these principles, you can then widen the aperture to enhance your values and take on other things and so because you fundamentally, I mean, as a private equity firm, you're investing to make money. And so, these are fundamentally good sound business decisions. But it's also really good that when you keep moving on, you've left behind a legacy where there's a viable, cohesive business and they're all working together. And you've got employee retention, you've got purpose, you've got leadership, and that ripples for generations, so good business sense plus, you know, plus.

Eltobgy

So ESG plus, exactly. I mean, when you think about it, we're investing to make money for our investors, right? For our LPs [limited partners] and endowments, foundations, family offices, pensions, all people, also all institutions that are accountable to their constituents and their stakeholders. And we're accountable to our stakeholders as well. And we feel that, you know, very much. Also, we are investing in a business for three, five, seven years, whatever the time frame is, to sell it. And we know that whoever we're selling it to is looking at these factors as well. It's one of these things that it's really about the long-term nature of the business and the ability of the business to generate value over the long term. So, I agree with you on all these points. I mean, I think everybody's kind of moving in the right direction. Some of it might take time, but I think the trend is clear.

Brown

So then on that note, let's take another kind of reality check. Clearly, the current economic environment is impacting companies. You know, everyone's feeling the crunch. So how is that impacting your focus on ESG? And are you staying the course? Is the strategy still clear, as we've just talked about, or is there some wavering in the short to medium term making allowances for where we are in the moment?

Eltobgy

Great question, Winna. Look, we are lucky that we invest in companies again. We're in a space where, you know, the business-to-business space where there may be a little less pressure. But we don't know. We don't have to survive. We don't know what things are going to look like, you know, two, four, six, 12 months down the road. What I can say is we invest in businesses that are quite essential in where they are in the value chain. Business models are generally cash generative, so that's good. Low levels of leverage, which is also great. So, it puts us in a position where we're not too concerned about, you know, interest rates. But again, nobody has a crystal ball. So, I see exactly where you're going. But I also actually think some of these factors become not more important but stay equally important. Because it's equally as important to think about retention, your employees and engagement. That's a cost that really we just don't want to incur in any of our companies. It's equally as important to understand the governance structure, to make sure that you have an alignment of interests, to make sure that if you're talking about ESG, it actually is part of your strategy and operations. You know, we spend a lot of time making sure it's on the board agenda. That's just a baseline, the first step. The other thing is to really think about it, when you ask again about some of the challenges that we face, it's also a question of, look, there are trade-offs. There have to be trade-offs, right? Anyone who says that there isn’t, I think, is like I don't know, let's just say I think there are trade-offs. I don't need to, like, talk about anyone else. I think there are trade-offs. I also think that the reality is capacity and capability. We buy successful companies, but there's always room for growth and there's room for improvement. So, we are working with our management teams to upskill and upgrade them. And the number of areas, sometimes it's even just basic systems for collecting data, financial data as well as non-financial data. You know, I think one of them, being on this side of the house now, one of the things that I realized is you're not just flipping a switch. It's not that easy to do. It takes time. its process, its relationship building, its trust. It's putting the right processes and controls in place, right? So, when we do these things, we can actually identify KPIs, we can measure, we can report, and that all just takes a little bit of time. And that's perfectly fine because then I think you set it up for success. So, it brings me back to the original point I made. One of the points I made was that there's a balance between top-down and bottom-up. You know, the notion of just like having a checklist, which I think is the top-down model, I don't actually think that that's the best model for a long-term value.

Brown

What would you think would be your advice for operating executives? They're out there. They're thinking about their next target acquisition. They're listening and inspired by the way you're approaching it. What's your secret sauce? What would you like to share with Amerit and advise them around how they should be thinking about long-term success?

Eltobgy

What I think, it comes back to what we talked about in terms of leading companies, where they are, understanding where the company is at, where the management team is at, but also where the entire team is at. What are their strengths? Where do they have room to grow? What's material- centric business? How do you go about finding that win that gets you in with the company and demonstrates success, builds the trust to then move on to other areas of importance when it comes to ESG, and other considerations of importance? So, I do think that you start with this notion of not bringing our values or perceptions, or ideals. Of course, we have some of that. And, you know, it's part and parcel of how we think about developing what's strategically what's important from ESG. But it's also okay, while you're working with a company here, what's important to them, what are their values? How do they see the world? And how can we together, to your point, improve this business, improve the livelihood of the people who are working in this business, generate money, generate returns, make money and not to be too starry-eyed about it, but you leave everything a better place. And so, our founder, Andrew Weinberg, likes to talk a lot about this notion of finance for good and finance can be a force of good. And so that's what we'd like to do as we work with our portfolio companies.

Brown

Fantastic. Maha, thank you so much for your time today. I really enjoyed our conversation.

Ending

Thanks for tuning in to the EY NextWave Private Equity Podcast. For more thought-leading perspectives and to get in touch with Winna Brown, visit ey.com/private equity. You can also follow us on Twitter @EYPrivateEquity. We'll see you on the next episode.

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