This article first appeared in The Edge Malaysia Weekly on July 18, 2022 - July 24, 2022
In the coming two decades, there are three major questions that humanity must address:
1. Is capitalism in its current form working? Apparently not. The world faces massive wealth inequality where the poorest half of the world only owns 2% of the world’s wealth, while the top 10% owns 75%. This inequality translates into major differences in access to basic and essential necessities, including housing, healthcare, education and even clean water.
2. Can the human species continue to grow and thrive without putting our global environmental ecosystem into terminal decline? No. Within the short span of about five decades, we have seen the global human population double to slightly under eight billion, while many other species have dwindled or disappeared altogether. Also, the impact humanity is having on the climate should be evident to all.
3. Is democracy functioning the way it should? Probably not. Globally, we seem to have reached a point where there seems to be a massive inequality of representation between the rich and the poor and between the entitled and the marginalised, where the elite have a stranglehold over the voiceless majority.
I shall set aside the third question as it is a subject that requires exhaustive discussion. However, the questions on capitalism and the environment deal with sustainability, which in turn deals with inequality and the lack of inclusiveness.
If there is good news in this, it is that these are potentially solvable issues with some of the means available to the investment community in general, including the segment of the industry to which my firm Bintang Capital Partners belongs, namely, private equity (PE).
According to Sir Ronald Cohen — founder of one of the world’s largest PE firms, Apax Partners — in his book Impact, for PE to succeed in championing sustainability, it needs to “overthrow the hegemony of profit within capitalism”.
For the longest time, the biggest (and often sole) motivation for PE investors has been profit. Today, Cohen argues, PE players need to ensure that we make sustainability an equal partner to profit as part of the investment decision-making process.
He argues that this is a very natural evolution of the “risk mindset” movement that started within the investment industry almost a century ago, where changes around how investors perceived, measured and managed risk dramatically altered the way investors constructed portfolios and made investment decisions.
The adoption of the risk mindset profoundly impacted the investment world: it changed the way risk was diversified within and across different asset classes and geographies. It also led to the emergence of new asset classes that combined higher returns and higher risk, including venture capital, emerging market investments and even PE.
Today, the universe of risks investors face has shifted beyond just financial and enterprise risk. As mentioned earlier, we are seeing the real impact of rising inequality and environmental degradation play out in real time. The widening of the risk mindset to include these “new risks” around sustainability is an important part of the journey the PE industry has undergone during the last two decades.
PE is uniquely positioned to do quite a lot, if the will prevails.
As a major beneficiary of the capitalist system, PE is in a unique position to play a major role in reducing inequality, either directly through its portfolio ecosystem (for example, by looking at employee welfare, healthcare, development and education within its portfolio of investee companies), by investing directly into critical areas such as healthcare and education (where we can place a stronger emphasis on giving back to the community), or even indirectly via charity and philanthropy.
As an example, Brahmal Vasudevan — through his firm Creador’s charitable arm, the Creador Foundation — is doing some groundbreaking work in the philanthropic space. This is something that Bintang certainly aspires to emulate in the future, as should all other Malaysian PE firms.
In terms of environmental sustainability, PE can play a role via its investments to champion businesses that have commercially-viable solutions to climate change problems, whether in the space of sustainable energy (Bintang’s partner company iHandal is a prime example), responsible and sustainable consumption (Bintang’s partner company Watchbox is a global leader in the pre-owned watch trading space), or food security and sustainability (we are currently exploring investments within this space).
The increased need for sustainability urgently needs to be repositioned as an opportunity. From a capital perspective, many of the global investors are now focusing on sustainable investing and are keen to deploy into sustainability and impact strategies. From a value creation perspective, many potential acquirers of PE assets are now looking to acquire businesses that already have sustainability embedded within their DNA.
This repositioning helps to address a major issue most of us in the industry face, namely, the misunderstanding that impact and sustainability must come at the expense of profits or returns.
This is a major challenge for all PE firms, whether when raising capital or when deploying capital. Investors often find themselves labouring under the misconception that sustainability-oriented investors are “investors who are looking to invest in unprofitable, but socially and environmentally responsible businesses”.
In reality, such firms have found a sizeable population of high growth and extremely profitable companies out there who want to be sustainable. But they also want investors on board who buy into, believe in and understand their journey towards sustainability.
As a PE investor, I remain pragmatic enough to realise that the journey towards sustainability starts with survivability. A company has to be economically viable first for it to be truly sustainable. Without survivability, sustainability is simply not sustainable.
Even with such convincing and pragmatic investment-driven arguments in favour of sustainability, I strongly believe that for substance to triumph over form, sustainability must be forged with belief and idealism. The idealism that we can not only do better, but we must do better. It should never just be a box-ticking exercise.
The journey towards sustainability is about the future. It is not just about having a future; it is also about what that future looks like. Bintang’s own journey towards sustainability started when I realised that what our firm does today would reverberate far into the future and matter a great deal tomorrow to my children and grandchildren.
For others in the firm, their personal journey towards sustainability was driven by things they have experienced or witnessed in their own lives: whether their experience relates to poverty, environmental destruction, abuse of fundamental rights (human or otherwise), lack of access for underprivileged and disadvantaged minorities and many others.
So, what’s next? I think there are two major ways the PE industry as a whole can mobilise itself to create meaningful change.
First, there must be advocacy within our industry. Advocacy is about creating greater awareness of the urgent need for sustainability. The PE industry has a tremendous amount of influence, whether via our investees, within our industry or with our stakeholders (investors, non-profit organisations who potentially receive donations from us, and customers of our investees).
The largest PE firms globally even have influence over governments in terms of how industrial and economic policies are set. I feel that the biggest challenge with advocacy is how to consciously and systematically change mindsets, and make sure that this new awareness sticks and becomes a permanent conversation.
Secondly, once advocacy has been established, a movement is needed within the industry that allows industry players to organise themselves and start a chain reaction across much larger ecosystems.
Welcoming and encouraging new participants into the sustainability movement is critical. Does Bintang want to be among the first players in this space? Yes, definitely! But do we want to be the only player? No. We need the scale and momentum of a movement for sustainability to build critical mass. How can this mass and momentum be built? It can be done through existing local PE industry bodies (in Malaysia, we have the Malaysian Venture Capital and Private Equity Association) and subsequently by connecting local players with the relevant global sustainability bodies.
In short, it’s about continuously having these conversations about sustainability and ensuring those conversations translate into action over time.
The good news is that a significant amount of momentum already exists within the global PE industry to move towards sustainability. The challenge for all of us is to ensure that the momentum continues to grow, with the ultimate aim of making sustainability a permanent cornerstone for all PE investment activity in the future.
We have perhaps a couple of decades left to set things on the right path before it’s too late. Let’s not waste this pivotal opportunity to preserve what we have for future generations.
Johan Rozali-Wathooth is founder & managing partner, Bintang Capital Partners
Save by subscribing to us for your print and/or digital copy.