ESG (Environmental, Social, and Governance) is a hot-button issue in private equity. GPs, particularly larger GPs, have been tripping over each other to implement processes that incorporate ESG into their investment practices. 

Like many other things in business, I could summarize my view on ESG as “common-sense”, with the caveat that common sense isn’t that common. Things like positive-ROI energy efficiency initiatives and ensuring qualified candidates aren’t overlooked because of the color of their skin or their gender should be uncontroversial amongst corporate leaders. Focusing on areas that are core to the business (i.e. ensuring a higher-risk factory environment has good safety policies and metrics) also makes sense. But, in the corporate America quest for standardization of metrics, one-uppsmanship, and justifying one’s cushy corporate job in the ESG department, I think some folks may have lost the plot.

This brings us to Bain Capital. 

Bain Capital is one of the largest private equity investors in the world. ESG and Impact holds a prominent place on the Bain Capital website. Active Governance and Stewardship is Bain Capital’s first ESG tenet, described as “holding ourselves accountable for driving value with high integrity (https://www.baincapital.com/esgandimpact/).”

Bain Capital was one of the first to establish a profit-minded impact investing fund, which has invested in some consumer and healthcare businesses that I admire like Cotopaxi and Convenient MD. Bain Capital also owns a business called US Renal Care, the 3rd largest provider of dialysis services in the US. 

I’m not going to comment on the ESG factors associated with US Renal Care’s business of operating kidney care clinics, but rather on Bain Capital’s governance. Like many healthcare services businesses, US Renal Care has struggled with rising labor costs and limited to no reimbursement increases (i.e. price increases) from insurers. Said another way – they’ve been taking punches from both sides. Its owners have responded to dwindling cash reserves by raising $328 million in new debt, with assets that its existing lenders previously had as collateral as the new collateral. Said another way, Bain Capital exploited a loophole in the US Renal Care credit agreement to put value in Bain’s pocket at the expense of creditors. While I don’t know for certain if this was a friendly transaction, generally PJT Partners and Kirkland & Ellis come to play when things get tense and terms like restructuring get thrown around. (https://finance.yahoo.com/news/u-renal-care-raises-328-120500696.html) 

Is this illegal? Absolutely not. 

Is this driving value? At least temporarily for Bain and its investors, sure. It gives US Renal Care more time to turn around its business, which has declined in profitability under Bain’s ownership.

Would I call it “high integrity”? Absolutely not. If you disagree, try telling your mortgage lender that you’ve sub-divided your mortgaged property without their consent, and took out another mortgage on the new parcel to finance an in-ground pool. But if I’m a Bain Capital limited partner, I might be supportive of anything that protects my investment. But in the next breath, I’d ask them why they’re bothering to spend money on ESG employees and marketing that’s clearly window dressing – after all, those PJT and Kirkland bills aren’t cheap.