One of the most significant changes to the private equity ecosystem over the past three years has been the establishment of environmental consultancy as a major link in the value-creation chain.
 

Greater emphasis on corporate social responsibility, fuelled by the Walker report recommendations, coupled with a consumer culture which demands better levels of environmental husbandry are causing private equity firms to seek advice from a specialised group of consultants when buying and selling businesses.

Among these are global businesses Environmental Resource Management, SLR Consulting, RPS Group, URS Corporation, Parsons Brinckerhoff and Golder Associates.

With private equity’s growing focus on assets which underpin society, this recognition has never been more crucial. Sadek Wahba, chief investment officer and global head of Morgan Stanley Infrastructure, which closed a $4bn private equity infrastructure fund last week, said: “It is absolutely essential to have a third party looking at green issues. This can also drive value – you cannot assume that the greening of a project is something which can be ignored. It is a variable people can’t pay lip service to.”

Demand for environmental consultancy appears to be unaffected by the credit crunch. John Simonson, global mergers and acquisitions director of consultancy Environmental Resources Management, said: “The market slowdown offers the opportunity to look in more detail at how a business could benefit from a more strategic environmental, social, health and safety (EHS) focus. This can cover resource-related issues such as energy use, waste and emissions, to wider areas such as trading carbon credits and the geographical location of key facilities.”

As private equity firms increasingly become consumers of environmental consulting services, they are also identifying this industry as a growth area with investment opportunities.

Many environmental consultancies, such as ERM, which UK-listed private equity group 3i sold to rival Bridgepoint for about three times its money in 2005, and SLR Consulting have become targets for private equity investment over the past decade.

Private equity firms have invested a total of €861m ($1.3bn) in environmental consultancies since 2000, according to research from Thomson Reuters.

This month 3i bought a minority stake in environmental consultancy SLR Consulting for £32.5m (€41m) from Isis Private Equity Partners in a deal that valued the company at £100m. With 220 employee shareholders in the UK, SLR is the largest employee-owned environmental consultancy in the UK. Globally the firm employs 650 people, 350 of which are based in the UK. The firm had revenues of £32.7m in 2007.

Rupert Bell, a director at 3i who led the investment in SLR, said: “Corporate and personal consciousness is creating a long-term growth market with environmental consultancy achieving sustained growth of 10% to 15% in the UK over the past decade.

“The first wave of big consultancies has been in North America. While it has not had some of the core legislative drivers effective in Europe such as the adoption of the Kyoto principles, consumer demand for and public awareness of green issues is making firms adapt.”

While historically, environmental due diligence was predominantly perceived as a way of identifying risk associated with changes to planning and legislation, today environmental consultants offer strategic advice which can support a business through to exit.

An example is this year’s £1.3bn take-private of UK waste management company Biffa by Montagu Private Equity and Global Investment Partners for which SLR provided strategic advice. Bell said: “In the world of private equity, what started as a simple piece of due diligence has become a way of looking at strategic issues that will go on to create value on exit.

“When advising Montagu and GIP on the Biffa deal, SLR developed a formula for increasing value through to exit. SLR has a long-term arrangement to do projects after the deal.”

This included assessing the impact of new legislation that covers the diversion of waste from landfill in Europe through recycling or treatment as well as increased taxes on waste disposal.

About 10% of SLR’s business is dedicated to financial and professional services, mostly covering acquirer and vendor due diligence.

Neil Penhall, the firm’s UK managing director, said: “Historically, if you mentioned environmental due diligence to a client the perception was that you carried out phase-one contaminated land assessments. Nowadays we have 27 different technical specialisations in the firm from energy saving to waste management. These issues can have material impact on the financial performance of a firm with related unexpected capital expenditure capable of changing the fortunes of a company overnight.”

Growth in environmental consultancy looks set to continue. The credit squeeze has left recent private equity deals with bigger equity exposures, prompting firms to take greater account of compliance.
Simonson said: “Another upshot of the credit squeeze is that some of our private equity clients are feeling more exposed on EHS liabilities because they are investing more of their own money. This in turn is starting to have an impact on the way they look at these issues.”