How private equity drives innovation

Matt Weiss (00:05):

Thanks to those of you tuning in today for what surely to be an informative and timely discussion about private equity and the role it's playing in American innovation. We're also going to focus on ESG trends. We'll touch on the recent new rules and amendments that were proposed by the SEC and what that means for the private equity space. But before we hop in all that my name at Matt Weis. I'm a director here on the corporate communications team at KPMG, where I oversee our industry communications team. I'm pleased to be a part of this conversation with three great guests we have on the line with us. We have KPMG's global private equity leader Glenn Mincey. We have Tania Carnegie, she's the global lead for private equity and asset management at KPMG IMPACT. And we also have the president of the American Investment Council, Drew Maloney. If you could just introduce yourselves, and Glenn, perhaps we'll start with you then Tania, and then Drew. If you just take a moment briefly, introduce yourself to our listeners and explain our organizations as some of those listening in may not be familiar with either KPMG or the AIC.

Matt Weiss (00:59):

Glenn, I'll start with you.

Glenn Mincey (01:01):

Hi everybody. I'm Glenn Mincey. Thanks, Matt, thanks everyone for being here. As Matt mentioned, I’m our global private equity sector leader for KPMG. And for those of you who don't know KPMG, we're a global accounting firm. One of the big four and our network extends across, I guess, more than 145 countries with over 206,000 employees. In the U.S. alone, we have 35,000 employees and I'll resist, , going through the address for each of our offices in the U.S.

Matt Weiss (01:30):

Thanks, Glenn, Tania, how about you?

Tania Carnegie (01:34):

Thanks Matt. Hello everyone. As Matt mentioned, I'm Tania Carnegie and in addition to being the global lead for our ESG and impact investing services for our private equity and asset management clients, I'm a partner based in our New York office. I'm part of our deal advisory practice in the U.S. and really focus on helping our private equity clients and asset management clients in the U.S. along their ESG and impact journeys. Building on what Glenn was saying about KPMG, I have a leadership role with KPMG IMPACT, which is a very significant initiative and part of the firm that we launched almost two years ago, which is our global platform. It is how we bring together all of our professionals from across all practices from across all geographies to serve our clients in their pursuit of achieving sustainable development goals and how we really take a collaborative approach, embedding ESG and impact as part of all of our services, so great to be here with all of you today.

Matt Weiss (02:38):

Thanks, Tania, and last, but certainly not least, we're glad to have Drew Maloney joining us today, and Drew I want you to introduce yourself and talk about the American Investment Council.

Speaker 4 (02:46):

Thanks Matt. Good to be here with everyone today. My name is Drew Maloney. I'm the president CEO of the American Investment Council. The American Investment Council is the largest advocacy and research arm for private equity and private credit. We're based here in Washington D.C., so we represent probably about 80% of all the assets under management in the United States and really develop the narrative around private equity and private credit.

Matt Weiss (03:15):

Thanks Drew. And we'll stick with you. The American Investment Council has a timely report out—it's called “Financing, American innovation, private equity’s role in the innovation economy,” and Drew a really timely, really insightful report, no shortage of interesting findings. Do you want to just start at the high level, what would you say stood out when you reviewed this report?

Drew Maloney (03:36):

Well, as you look back on last year, it was a very significant year for private equity. You saw a record amount of investment of over a trillion dollars. A lot of people don't recognize that a lot of that money, , approximately three quarters of that money, went to small businesses with less than 500 employees. And out of that trillion dollars, a large portion of that is going into innovation. And we are really one of the leaders in pushing and protecting and encouraging American innovation. One of the most interesting aspects of the report from last year was the fact that in the ecosystem of private equity venture capital, venture capital sold about 300 of their deal into private equity. Now we're all part of the same ecosystem, but I thought that was one of the more … you saw a lot more exits from venture capital going into private equity. And I think part of the reason for that is we're able to take the companies that are based into the next level. And I think you saw that a lot in what we do in growth equity.

Matt Weiss (04:45):

Drew, I want to stick with that, that number that you hit on – the trillion dollar mark. And in addition to what you referenced, notice that deal making in the tech sector was certainly a driving force in hitting that mark and Glenn, let’s start with you on this question and certainly we’ll open up to the broader group. Glenn, in your role here at the firm, when you look at that mark, and certainly what happened in the tech sector, what would you say made the tech sector such fertile ground in the last year or so?

Glenn Mincey (05:11):

I think it's easy for us, even as laymen, to see that there's an increasing need for digital tools and retail, healthcare hospitality, every other sector, really. And it's old news, we've said it before, but it's still true. Tech is no longer a vertical. It's really a horizontal across all the other sectors—it's retail plus tech, healthcare plus tech, hospitality plus tech, etc. And as I said, as laymen, we can even see that it's easy to see applications from inventory management software in a constricted supply chain world, to customer experience apps, but look at the fundamental business imperatives themselves, right? And consider the PE playbook. A big, big chapter is to help companies scale and get immediate access to larger markets and increase their customer base. Right? Drew mentioned that a bulk of the money, a bulk of the powder went to small private companies.

Glenn Mincey (06:03):

And if you look at smaller fragmented tech and software companies, they tend to focus on the tech aspect or what they do best rather than market driven capabilities. And they can benefit enormously from economies and and sophisticated management that they get from the PE marriage. And then just pushing it even further, we're talking about innovation through the investment lens, but look internally to the operational lens, not only at the fund level, but the portfolio companies themselves. PE is going to look at sophisticated tech companies, or otherwise disrupted technologies to really speed up their yield process and internal processes. They're going to look at disruptive technologies, such as DLT or distributed ledger technology, AI, RPA, or machine learning, and those are going to play a meaningful role in helping them achieve their internal processes. So, it's natural to see that they invest in those companies as well.

Matt Weiss (06:55):

Glenn, you raise a lot of great, great points and, Drew, Tania I kind of think for both of you this next set of questioning, these two issues are certainly intertwined with cybersecurity. And then also, I know Tania, we were talking about ESG earlier and we'll get to that in a moment. I wanted to start with the cyber piece. Drew your report also noticed that the cybersecurity space saw a lot of growth last year. And it was, I think, after a few years where the deal volume might have been a little low, and it accelerated again. What have PE firms done to help cybersecurity companies innovate and broaden in their offerings in this environment?

Drew Maloney (07:29):

Well, as, Glenn highlighted, we spend a lot of time partnering with the companies that we buy to get scale, to increase their offerings. And I think what you saw over the past couple years is—and I think this was probably exacerbated during COVID—is that much of our life has moved online and reliable platforms are required to help businesses and organizations operate more smoothly. , The number of cyber attacks on businesses has increased like twofold just in the last year. And I think that's why you saw over the last two year period, more than 200 companies that received private equity investment.

Matt Weiss (08:17):

I think that's spot on. And Drew and Tania, we talk about investments being made in priority areas, ESG, certainly at the focal point of that across really all aspects of the economy, all businesses, and it's become a factor in the PE space, how funds evaluate assets, how they manage portfolio companies. What would you say are skills that PE executives are developing to turn ESG from just a compliance burden, if you will, to an opportunity to create real value?

Tania Carnegie (08:44):

Matt, what you've described is the massive shift that we've seen in ESG just over the past 18 to 24 months. It’s this big mindset shift that's happened that looks at ESG, not just as a set of discrete factors that have implications for particular types of companies and particular geographies or industries, and not just something that is seen from a risk management perspective, but something that is now a whole of portfolio issue. And as you said, moving from this to a risk compliance perspective to something that creates value, and this is the top of mind conversation that we see happening across the PE industry. And I think it's recognizing the role that ESG plays in helping to to build better companies. If we take the example of cyber that we were just talking about a moment ago, this is an issue that affects companies across the board.

Tania Carnegie (09:46):

So from an ESG perspective, what we see as our PE clients looking at, okay, how is it that we're effectively managing the risk associated with cyber attacks on our portfolio companies in a proportionate way to the potential impact, but then also on the value creation side. It's like, well, hey, wait a minute, this is such a significant risk. Let's look at the opportunity side and let's look at how we can be investing in a way that is going to be contributing to solutions and a case in point, like a number of our clients when they're communicating their ESG approach, they're communicating around issues like cyber in both of those ways, both as how we're helping our clients to manage risk, as well as how we're pursuing the opportunity in this and how we see the growth and the upside benefiting not only the firm, but its investors, which is really exciting.

Tania Carnegie (10:38):

So, I mean, this is representing a whole big mindset shift, and there is an upscaling that's required. I think, first of all, to become educated around the different dimensions around ESG and this is something that we see our clients working on, and an area where we're actively working with our clients to help them come up with a consistent understanding and definition of what ESG means and, and in particular, what it means to the type of investor that they are. But also upskilling around particular issues like climate and what are the implications for the firm, for the PE firm itself? What are the implications across this portfolio and then how to manage those issues from an opportunity perspective? So we see this as just really such a, a predominant issue in our client conversations across the board, even the ones that don't have ESG explicitly in the agenda.

Matt Weiss (11:31):

Tania, thanks for those. Go ahead, Glenn.

Glenn Mincey (11:34):

I just wanted to jump in and piggyback off of Tania's points. She talked about the sea change and the change in mindset. I mean, it really is a sea change. In the old days, maybe two years ago, two, three years ago, ESG was confined to impact investors or niche, special purpose funds. Most of which Tania had connected with and known. We did a value creation survey across over a hundred PE funds and portfolio companies that were headquartered in the U.S. and the UK, and all of them first, let's talk about the red flag, the old days, right? Where ESG was a red flag exercise and a risk exercise over 90% of PE funds. Of those surveyed had declined in investment due to ESG criteria, but now easily, 70% of all the firms look at ESG factors in the early stages of deal evaluation. And if you go to the bigger funds, those with over a hundred billion in AUM, it's 88%. They're looking at ESG and the value creation in the deal assessment and due diligence process.

Matt Weiss (12:35):

I want to, as we wait, see if there are any questions. Drew, I want to start with you on this. I teased it out at the beginning, certainly, it’s timely what's come out of the SEC, some new rules and amendments proposed by them. And obviously Glenn, Tania, I welcome your thoughts for those who are listening in and are unfamiliar the SEC’s proposed new rules and it's under the Investment Advisors Act of 1940, better known as the Advisors Act in an effort to protect private fund investors and promote, as they said, increased transparency, competition and efficiency within the private fund market. Drew we'll start with you. What, in your view, do these proposed rules and amendments mean for the ESG space?

Drew Maloney (13:14):

It's a great question. And I think one of the reasons that we highlighted the innovation report is because there's a very robust debate going on here in Washington about American competitiveness. And one of the points that we make is, America really is competitive or the leading country on innovation. And what makes that special and unique to the United States is the set of rules and regulations that we have that encourage entrepreneurship, encourage investment. And I think we're concerned that if you layer more regulations on companies and companies and investors with entrepreneurs and small business, that are oftentimes unnecessary, that will just inhibit our ability to continue to be a leader in innovation. And I think that's what we're very concerned about. We’re happy and we do work with our investors in a very transparent and open way. And we believe that any rules going forward need to be fit for purpose. And don't sort of choke the marketplace with these unnecessary burdens,

Matt Weiss (14:27):

Glenn and Tania, from the KPMG perspective … I see Matt Caruso, you’re back on, was there something to add?

Matt Caruso (KPMG social media director and host) (14:33):

Yes, we had somebody who wanted to ask a question. Go ahead.

Speaker 6 (14:39):

I joined a bit late, so I'm sorry if this has been addressed, but when I saw your topic, I had one question. I know industries like healthcare, B2B, are all definitely affected with private equity and innovation. Are there any other industries that you think can be helped by private equity and like, how do they drive innovation? Like what are all industries impacted?

Matt Weiss (15:04):

Well, thanks for that question for Drew , Tania, Glenn. Just in case, there was some cut out on my end. It sounded like the, the question was about we talked about some industries and how PE is helping in the innovation journey, where you're talking about the tech sector, whether you're talking about healthcare manufacturing, are there any other sectors that we didn't touch upon that you look at and say, PE is really playing a driving role and maybe Drew I'll start with you. If there was anything of note further from your report that you wanted to raise. That's

Matt Weiss (15:29):

Great question, Tania, welcome both of your perspectives on that also.

Drew Maloney (15:33):

And to build both on Tania's and Glenn's point on ESG, if you look at the amount of investment last year in sustainable energy projects throughout the country, there was about 50 billion invested nationwide. 25 billion of that came from private equity. So, now nearly 50% of all the new capital coming into that space is coming from private equity. Take life sciences. In Massachusetts alone, private equity backs, I believe it's a little over 300 companies that are all seeking treatments for rare diseases, so we have a very positive role to play in helping these companies scale and grow and partner with a lot of experts in in the industry in order to bring the products to the next level.

Matt Weiss (16:30):

Drew, Glenn, and Tania, you’re probably going to say this, but Glenn and Tania, you both speak about this point, maybe you can expand, explain it more to our audience about how PE doesn't invest in the Page 6 of 10 moment, right. They're investing in the long term. They're not investing just in a particular cycle. I think Glenn, that sort of speaks to a point you make often.

Glenn Mincey (16:49):

Yeah, absolutely. And, and you're right. They, they're not. That's more of an inflationary question, a change of administration question and, and they do. The question you'll often get Drew, I'm sure you get it all the time, is what does the future for PE look like in a blue administration or a red administration? And PE doesn't do that. They don't focus on, they don't invest in the interim, but through the cycle rather. And the same thing with cycles as well, which we are clearly going through. And I'm sure we'll, we'll touch on that in just a second, but back to question itself, to the point I made before about tech being a vertical, PE is hyper focused on the on tech, and how tech can innovate every single industry.

Glenn Mincey (17:34):

And if you look over the past year, TMT was, certainly the highest TMT was in industrial manufacturing sectors. They certainly led deals by value, but as Drew noted, healthcare and life sciences was huge as well as consumer retail. Healthcare and life sciences was up 132% or something like that. And retail was up almost 90%. And this is, this is post – sorry, not post COVID yet, but through COVID. And then Drew also mentioned how nimble the private equity industry is. If you are in an industry that requires inperson volumes like healthcare, what do you do when suddenly the world shuts down and, PE shifted immediately to tech and healthcare, right? Not only labs and, and the so-called back office functions, as well as technology and healthcare, the ability to do remote healthcare and going back full circle to Tania, remote healthcare certainly benefited the most disadvantaged portions of our society that couldn't get to medical care, right. And gave them the ability to do that.

Matt Caruso (KPMG social media director and host) (18:44):

Wanted to bring in (KPMG Partner) Jeff Millen to the conversation. Jeff’s got a question.

Jeff Millen (18:50):

Sure. Thanks guys. Interesting discussion so far. You're really making the case that private equity is doing some great things, particularly around innovation and impact. Maybe this question is for Drew, but as a retail investor, is the only way to access some of this through publicly traded private equity funds, like, Blackstone or others, or is there a way to make it more accessible to a broader swath of American investors or otherwise?

Drew Maloney (19:15):

Jeff, that, that's a great question. And in the last administration, the Department of Labor put out guidelines that would allow for plan operators to start to have the ability to add private equity to a 401K plan. And I think the idea behind that was, if you have a target date fund that's, like it's a 20/40 target date fund, maybe an allocation of private equity of 8% or 9% or whatever the percentage would be, could be allocated on a voluntary basis to that. The only other way, and I don't think it'll happen at least under the current administration, is lowering the accredited investor standards to allow access to private capital. But we're big believers in democratizing the ability for anybody who wants to invest, they should be able to, and I think that the right sort of way to go is initially through this 401K where you have a fiduciary in between you that's doing all the due diligence on the deals so you don't have to worry about it as an individual retail investor.

Matt Weiss (20:27):

Jeff, thanks for the question. Great question, and Drew thanks for your response. We're coming up at the bottom half of the hour here and just want to be mindful of time. Drew, I didn't know how much longer you could stay on with us, but we want to keep the conversation going here. I wanted Tania to be able to chime in, raise some great points on the ESG front. I want to start with you Tania on this question, which is, there's a great case study in the AIC innovation report, talking about how during COVID PE firms helped portfolio companies ease their workforces into remote environments. But now of course, we're all hearing about the great resignation and the challenges of keeping and acquiring employees is a major focus for every sector. What are some of the ways PE firms are addressing the talent challenge to keep the U.S. innovation economy running, if you will?

Tania Carnegie (21:16):

It's a great question, Matt. I would say one of the top focus areas of PE firms around ESG is on diversity, equity, and inclusion, and how to really drive a culture of DEI within not only their own firms, but within the portfolio companies that they've invested in. And what we've seen over the past few years are a number of initiatives, including establishing targets for DEI at the board level, at the management team level of portfolio companies. We're also seeing an increase in supplier diversity initiatives, and in KPMG, we were involved, we partnered with FCLTGlobal to produce a study with a number of the members of the PE community to really look at how to embed DE&I further into the professional services firm selections that are made by both portfolio companies as well as PE firms. So we really see this as a top issue that's permeating leadership discussions, just recognizing the value that DEI brings in particular, the diversity of thought that comes from having people with different experiences, different perspectives around the table to the innovation culture of a company.

Matt Weiss (22:46):

Thanks, Tania. And, , Matt, I believe we have another question.

Matt Caruso (22:50):

We've got a question from Juliana. I wanted to bring her into the conversation. Juliana's background looks like she is a digital content strategist and a (Twitter) Spaces host. So I hope we're doing a good job here and fire away, ask your question.

Juliana (23:06):

Okay. First of all, you guys are doing a fantastic job, amazing Space, very well organized in terms of thought and all that good stuff, but please, pardon me, if this has already been addressed, I'm curious, can anyone speak to how private equity is driving innovation in the clean energy sector? Specifically, I say that as an American who is concerned about climate change and rising energy costs, and what's the world going to look like if for our kids down the line and things like that. So, fire away anybody if that hasn't already been addressed?

Drew Maloney (23:37):

Thanks for that question. And we may have hit on it just a little bit earlier in the sense that over the past decade you've seen an increased amount of spending in the private sector, especially through private equity. Last year alone, private equity represented about 50% of all the new capital going into sustainable energy. So I think it's, as we think about this energy transition, it's a 50-year transition and it doesn't happen overnight. And I think you will see not only are we investing in sustainable energy projects, but we're investing in companies that are trying to make buildings more efficient, outline more efficiencies inside of supply chains and other things to try to do our part in order to meet this global challenge.

Tania Carnegie (24:29):

Well, just to build on that, and Juliana, thank you for the question. Climate is another one of the top issues that our clients are focused on addressing, and not only are they investing in solutions to ease the transition to the low carbon economy. And we've seen this through the launch of a number of climate dedicated funds over the past year and a half. But our clients are also looking at the companies within their portfolio and how they can help them transition to be successful in the low carbon economy. So, in a lot of cases, there's a tremendous focus on transitioning companies that are currently in high-emitting industries. And how is it that through through PE investment and PE influence, those companies can now become more focused on low carbon economy opportunities, so to pivot their business model, and then having a very conscious thought about, okay, well then what does this mean for people who are working in the companies who are impacted by the communities that these companies operate in, making sure that it's a just transition that's creating equity for all.

Tania Carnegie (25:37):

So just wanted to add that these are some of the other top of mind conversations and ways that we're helping our clients.

Juliana (25:46):

Thank you so much. That is so an inspiring because what you've done is create, you've spread the accountability across the entire spectrum, not just the one specific clean energy sector, but made us all responsible for thinking about how we're going to change. Thank you.

Glenn Mincey (26:00):

And Juliana, just to piggyback on that. And you'll be even more inspired by the industry. Tania and I and Drew, we see and hear what these people are saying. They're less interested in ESG by press release as many other industries are doing. We’re much, much more concerned about investing in future technologies and actually changing the world. And we can certainly attest to that. Hey Matt, before we move on to the next point, Tania had talked about the effect on the workforce, and let me not lose an opportunity to talk about workforce impact. Wage inflation is one of the huge, huge headwinds in addition to inflation and supply chain limitations that we've all seen. Wage inflation is an issue that really goes in one direction and everyone considers how losing a key employee has its immediate consequences to the business plan, but the time and cost needed to rebuild is even more significant.

Glenn Mincey (26:51):

And so, PE has really started to focus on workforce impact. And let's be clear, traditionally or historically PE and workforce has had a connotation of efficiency and cost cutting. But today they're really focusing on human capital management as a priority and as a business imperative frankly. Any of these PE portfolio companies employ sometimes thousands or hundreds of thousands of people. And if you look at KKR’s employee stock program, as an example, they've awarded non-management employees with stock a across eight industrial companies. So industrial firms, particularly you could see, but it goes in many other types of industries as well, the majority of the workforce have levels of income that don't get incentivized by their engagement, but they're critical to your success and makes them much, much more efficient employees.

Matt Weiss (27:43):

Glen, glad you raised that. Inflation is such a timely topic dominating the news cycle, certainly on the economic front. And we're past the half hour mark here and want to be mindful of your respective schedules. But I think we have a few more minutes and I think a good topic to sort of continue and piggyback off what you're talking about Glenn. And Drew, I'll start with you and then certainly welcome Tania’s and Glenn's perspectives. Obviously, nobody, if you look back over the last year or two, nobody could have predicted how things have played out in terms of what the pandemic and the impact it's had on the economy. Just focusing on private equity Drew, as you sit here, we're at the beginning part still of 2022, we're coming off of this historic year for PE activity where we began our conversation, the trillion dollar mark being hit. What do you feel is the outlook going forward here throughout 2022 for the PE sector? Do you think it's primed for yet another historic year, despite all the tumult that we see going on in so many aspects of the economy?

Drew Maloney (28:36):

No, Matt, I think I, I think you're exactly right. I think we are on par for another solid year of investing. It's going to be, at least it started off as a volatile year, but I think that there's going to be ample opportunity for investment throughout this year. I think, back to Glenn's points, private equity is not immune from inflationary pressures. We own the same companies that are publicly traded, as far as the same sectors, and we have the same challenges. Labor's a big challenge for us. I was just on a water infrastructure board that has a big Texas footprint and we have 150 openings in Texas right now and are having challenges trying to fill them all. And, so I think we're all going to experience these challenges. But what I will say is, and I'd be interested in Glenn’s and, and Tania's perspective on this, I think that private equity is attracting some of the best talent in the marketplace right now. I think a lot of people want to work for private companies. They enjoy how nimble they are. They like the growth aspects of them. They like the risks that we'll take in order to grow the companies. So I think private equity is probably attracting some of the best talent that we have in America right now.

Tania Carnegie (29:54):

And, Drew, we're certainly seeing a high interest for working in the ESG and impact side of private equity in particular. I think professionals, whether it's young professionals who are just starting out in their careers or very seasoned private equity professionals, what's really attracting them is the ability to combine their expertise and their skillset in finance with a very deep sense of purpose. So we know that ourselves as we are building our team, that we're inundated with resumes of such incredible candidates and our clients are experiencing the same. So, certainly we see that from the private equity world that I've been focused on.

Matt Weiss (30:42):

Glenn, anything further to add?

Glenn Mincey (30:44):

Well, was nodding vehemently when Tania was talking about that, and when Drew was talking about how young people are attracted to the industry and they want to make a change and, let's face it, private capital has a vitally important role to play here in solving these issues, right. But, and consumers want to do business with responsible companies. And let's not, we're not singing Kumbaya here. Private equity is looking at these imperatives, not only because they want to change the world, but because it's better from a business imperative. And that's the only way that we're going to have sea change across the world.

Matt Weiss (31:21):

I think it's a good note to end the on. I want to take a moment to thank everybody who took time to focus on this.

Matt Weiss (31:27):

Thanks for joining KPMG U.S. News Twitter Spaces, Be sure to stay tuned for more great conversations.