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Are B Corporations and private equity compatible?

By Paul Bryant – Bridges Fund Management and others share their views on the growing B Corp movement within the impact-investing arena…

More businesses are formalising their ESG credentials by becoming certified ‘B Corporations’ or ‘B Corps’, where the ‘B’ stands for benefit. And it’s not just a trendy badge or politically correct aspiration. 

B Lab, the non-profit organisation behind the movement, has created an impact assessment that measures companies on governance, worker, community, and environment metrics. Those meeting the minimum criteria qualify for certification and are re-assessed every two years. B Lab identifies best practice, creates benchmarking measures and co-ordinates knowledge-sharing among members so they can continually improve, with a mix of ‘quick-wins’ and larger, longer-term ESG projects.

There are nearly 3,000 B Corps worldwide, with just under 200 in the UK. Outdoor clothing company Patagonia is probably the highest profile, along with some of the subsidiaries of Danone (Danone Fresh Dairies UK is a B Corp). There is also a handful of publicly quoted B Corps such as cosmetics company Natura.

Chris Turner, executive director of B Lab in the UK, says it feels like an inflection point in the movement’s growth, with interest accelerating among smaller businesses as well as large multinationals. He says the momentum is being driven by consumers, employees, investors, entrepreneurs, and managers all wanting businesses to be run in a more sustainable way.

But he also stresses how big the commitment is. Turner says that businesses work hard to meet the B Corp standard and then to continue to improve their score – which is made public – over time. And B Corps have to change their legal status. In the UK, articles of association are changed to reflect a consideration for a wider group of stakeholders, not just shareholders. Similarly, in the US, over 30 states have enacted ‘Benefit Corporation’ legislation – a specific legal form of business incorporation (not to be confused with B Corp accreditation obtained through B Lab).

Luke Fletcher, partner and co-leader of the impact economy practice at solicitors Bates Wells – itself a B Corp – explains: “The default position in the UK Companies Act is that the duties of directors are to promote the success of the company for the benefit of its members (shareholders) and to have regard for different stakeholder interests. It’s a shareholder primacy model, where considerations other than to shareholders are subsidiary. So if you want to create a model where the board is mandated to not only create shareholder value, but to act in a way that is beneficial to say wider society and/or the environment, and on occasion prioritise these other interests, then you need to change the articles of the company to be able to provide that mandate and to protect the directors.”

In his experience advising impact-focused companies, Fletcher says B Corp status is often a positive for attracting investment: “I would describe the impact economy as an emerging market within a developed market context,” he says. “From our client base, which includes a wide range of investors, there is a lot of interest and a lot of capital looking for impact investing opportunities.”

Private Equity is no exception.  Bridges Fund Management is a B Corp and runs its funds with an emphasis on impact-focused companies, while TowerBrook Capital Partners was the first mainstream private equity fund to receive a B Corp designation.

James Hurrell (pictured), a partner at Bridges, says B Corps can be a good fit with private equity, emphasising that impacting investing does not have to come at the expense of financial returns.

“We invest in businesses that can deliver ‘PE-level’ returns,’ he explains. “But we’re also looking for social or environmental impact on top of that. We believe the kind of practices the B Corp movement promotes make long-term sense from both a commercial and impact perspective.”

Another point of compatibility Hurrell highlights is around change. He says: “One of the things PE does well is drive change at pace. The B Corp process of getting and staying accredited assists that agenda. It forces management teams to think hard about ESG, scoring them on it and giving them a list of action points to focus on. That helps to make our model work. It brings a change mindset to management that is well aligned with the PE mentality.”

Tim Kelly, Executive Chairman of Vegetarian Express, a B Corp in the Bridges portfolio, is also positive: “The benefits certainly outweigh the costs. There is a process cost of going through the application, and also costs associated with improving standards to meet the minimum criteria. For example, we had to change some HR practices to qualify. But we found that requirements such as the codification of processes, policies and governance helped us transition from a privately run, owner-managed business into one that was compatible with PE investment. And the additional transparency helps us tell our story. Nearly everyone – customers, suppliers, employees – think it’s a good thing to do.”

When quizzed about a potential incompatibility between investing in a B Corp and the PE exit process (being a B Corp requires consideration of all stakeholders when selling a company), Hurrell doesn’t believe it will be an issue. 

He says: “Some have noted a potential conflict between B Corp status and an investor’s desire to maximise its financial return.” 

However, Hurrell says, both management and investors will typically select a new partner based on a range of financial and non-financial considerations – whether the business is a B Corp or not. Moreover, if B Corp status reflects a better-run, more sustainable business, this should make it more attractive to potential investors. Hurrell highlights that there are more and more acquirers looking for companies with strong ESG credentials – Unilever’s acquisition of B Corp Pukka Herbs being one recent example – which means more potential exit routes for PE investors.

Kelly expands on the exit point, saying the decision at Vegetarian Express to become a B Corp was specifically analysed in the context of its impact on a future exit: “We came to the conclusion that it would help with our exit. It would help to create value, not just for current investors, but also for the future owners who would be acquiring a better business, he says. “We are about to publish our first set of financials since becoming a B Corp and I have had to write a statement with our filed accounts about how we run the business and take into account all stakeholders. So everyone – including potential acquirers – will see this non-financial information which can only be a good thing.” 

On a more day-to-day level, Hurrell says that one of the biggest benefits of B Corp status is its power to help attract and retain employees. Portfolio companies and Bridges itself have found it helpful in becoming ‘destination’ employers, and in supporting an impact-focused culture in the business.

And while cautioning that the B Corp label is not a marketing panacea, Hurrell says it can help both B2C and B2B portfolio companies, and PE funds themselves, win new business. Consumer brands can market their sustainability credentials with more credibility, while B2B companies such as Just Ask – a facilities management company in the Bridges portfolio – use it to score well on social value criteria when tendering. 

From a PE perspective, Hurrell says: “It helps us win new deals. It’s not just the B Corp status alone, but it adds to the narrative. Companies choose to partner with us because we look to invest in companies that want to do more than just deliver a financial return. I would also argue that it helps grow the pool of capital wanting to invest in Bridges.”

For now though, investing in B Corps is still a niche area for PE investors. Hurrell says: “When you consider that PE investors will be looking at hundreds of companies a year, just to invest in a few, the actual pool of investable B Corp opportunities is still small. That said, we keep a close eye on them for investment opportunities, as well as helping a number of our existing investments to become B Corps.”

Bridges is bullish about the future of the movement. Hurrell adds: “It may still be niche, but it feels like there’s lots of positive momentum. And over time, we should see a network effect. The more B Corps there are, the bigger the benefit of being a B Corp becomes, from sharing best practice to broader recognition of the B Corp brand.“  

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