Almost four decades of investing have taught us that our most important work can occur during tough and volatile times. In order to turn uncertainty into growth in challenging markets, companies need capital and operational expertise, advice on navigating capital markets, and the ability to keep focus on the long term while managing short-term crises. The past year was no exception. We spent considerable time and attention putting capital to work and helping the companies in which we invest understand how emerging trends, economic and geopolitical uncertainty, new regulations, and changing public attitudes and expectations could impact strategies and performance.
Additionally, in this volatile environment, our commitment to responsible investment — the consideration of environmental, social, and governance (ESG) issues in our investment and private equity management processes — is even more critical. As smart investors, we work to understand all of the performance drivers, both inside and outside the business, of the companies in which we invest. This understanding not only enables us to improve the business performance of our private equity portfolio companies, but it also means that we can build stronger relationships with company management teams and other stakeholders. In turn, these relationships provide opportunities for us to create shared value.
At the same time, the 2012 U.S. presidential election has increased public focus on, and discussion about, the private equity model of governance. While our industry was once private, today we and our peers have the opportunity to engage with key stakeholders about how private equity can best contribute to a healthy global economy. Over the past few years, we have increased our transparency and our proactive engagement with stakeholders. As part of these efforts, we have improved communication about our investment model and have endorsed the Institutional Limited Partners Association (ILPA) Private Equity Principles in 2011.
In our first ESG report in 2010, we discussed how our approach to responsible investing could benefit our investors and our portfolio companies’ bottom lines and employees, as well as other stakeholders, the environment, and society in general. In 2011, we made significant progress on our journey by partnering more strategically with our investors, private equity portfolio companies, and other stakeholders, focusing on the importance of strong partnerships within KKR and harnessing the power of our one-firm culture.
We believe that 2011 included great accomplishments and important milestones on our journey. We continued to build on existing efforts, while also launching new and innovative programs that we believe have the potential to add value to our investments. For example:
- We enhanced our diligence process by instituting a regular meeting of cross-functional experts to review new and pending investments from an ESG perspective.
- Our Green Portfolio Program continued to highlight how our portfolio companies create value through environmental initiatives. In addition to avoiding more than 800,000 metric tons of greenhouse gas emissions and 300 million liters of water use, the results showed that these initiatives contributed more than $365 million in cost savings or added revenue for participating portfolio companies.
- We launched exciting, new efforts including a pilot of the KKR Workplace Wellness Program, our Vets @ Work initiative, and a program to “green” the KKR offices.
While we are proud of our progress, our efforts have not been without challenge. As we noted last year, we invest in highly complicated, often global companies that every day must balance competing interests and make difficult trade-offs. While some may not agree with our conclusions, we believe the key to success is to thoroughly and carefully incorporate ESG considerations into our decision-making.
Just as in other aspects of investing, the process for understanding and better managing ESG issues is one that we must continually work hard to improve. As a result, we have looked more closely at our capabilities and practices and made adjustments for the future, including building a new team focused on understanding macro-economic trends and strengthening our diligence on “non-financial” factors when considering a private equity investment. By listening to our partners and learning from past challenges, we are in a better position to create long-term, sustainable value.
In addition, as KKR continues to diversify its business outside of private equity and increases investments in new regions, we must remain thoughtful — both in how we apply our approach to responsible investing and in how we grow as an organization and maintain the values and culture that have been the foundation of our work for more than 35 years.
In our 2010 ESG report, we explained our private equity investment process and how our responsible investment efforts are integrated into this process. We said that we were at the beginning of a journey but understood that considering ESG issues in the investment process is an essential part of creating sustainable value. In this, our second sustainability report, we seek to expand that important discussion and also to highlight our progress as we continue this journey. We established new partnerships, expanded our capabilities, and found new ways to create value. We could not have achieved what we have without the strong partnerships we have in all facets of our business.
As always, we welcome your feedback on this report and all of our efforts. We thank you sincerely for your partnership and look forward to further innovation and progress in 2012 and beyond.
GEORGE R. ROBERTS
Co-Founder, Co-Chairman and Co-CEO
HENRY R. KRAVIS
Co-Founder, Co-Chairman and Co-CEO