May 1, 2008: 12:51 AM EDT
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Private equity goes green

Kohlberg Kravis Roberts strikes partnership with the Environmental Defense Fund.

By Marc Gunther, senior writer

(Fortune) -- Private equity firms are renowned -- and occasionally denounced -- for squeezing costs out of companies they buy. Their investors say buyout funds help the economy become more efficient, and build shareholder value. Their critics allege that they do so by exploiting workers, avoiding taxes and polluting the planet.

We won't try to settle that argument here, but it provides a useful context for Thursday's announcement of a partnership between Kohlberg Kravis Roberts, one of the world's leading buyout firms, and the Environmental Defense Fund, a nonprofit environmental group. Their "green portfolio" partnership -- the first between a big private equity fund and an environmental group -- is intended to measure and improve the environmental performance of KKR's U.S. companies

This news is, all at once, significant, surprising and predictable.

It's significant because of the scale of KKR. Established in 1976 and still led by co-founding members Henry Kravis and George Roberts, KKR says it has completed more than 160 transactions with an aggregate enterprise value of over $410 billion. As of Sept. 30, 2007, KKR's equity investments were valued at more than $86 billion. Its holdings include retailers Toys 'R Us and Dollar General, health-care giant HCA (formerly the Hospital Corporation of America), the power generator Energy Holdings (formerly TXU), U.S. Food Service (a big food distributor) Masonite (doors), Sealy (mattresses), First Data (credit cards) and Nielsen (TV ratings).

If even a handful of those companies adopt greener practices, that will matter. Just as important, KKR and Environmental Defense say they will develop tools that companies can use to measure their environmental performance, and that the tools will eventually be made public.

"We'd like to create a ripple effect as best practices spread," says Gwen Ruta, vice president of corporate partnerships for Environmental Defense.

What's surprising is that KKR would seek the help of an environmental group to improve its operations. Eco-efficiency, after all, is mostly a matter of using less energy or water or paper, generating less waste or finding ways to better operate vehicle fleets or data centers-things that well-managed companies presumably already do.

Even so, KKR's Marc Lipschultz said the firm's portfolio companies should be able to benefit by tapping into the expertise of people at Environmental Defense.

"We're all about improving businesses. That's KKR's core business (and) we like to think we are good at it," said Lipschultz, a member (partner) of the firm. "We'd like to be the best at it."

He's probably right that there's room for improvement. Another famously lean company -- Wal-Mart (WMT, Fortune 500) -- discovered ways to become even more efficient after setting big environmental goals, like eliminating all waste and cutting energy use by 30% in its stores.

The Wal-Mart example also helps explain why KKR's move is predictable. First, the green wave sweeping corporate America was bound to eventually catch on with private equity firms. Second, private equity firms like KKR have come under attack lately, as Wal-Mart has for years, and so they are motivated to seek out ways to improve their reputations.

Several months ago, the 1.9-million member SEIU labor union issued a stinging 38-page report accusing KKR of mistreating workers, ducking taxes and owning companies that are accused of "industrial pollution and a lack of transparency when it comes to environmental impact." The evidence was pretty thin -- pollution from a couple of chemical plants, one of which is no longer owned by KKR, and poor reporting by others -- but no company wants to be the target of a union campaign.

In a statement, KKR said the criticism "played no role" in the decision to work with Environmental Defense. Both groups say the partnership took root early in 2007 when KKR, the Texas Pacific Group and Goldman Sachs (GS, Fortune 500) bought TXU, a Texas utility company that was then seeking permission to build 11 coal-fired power plants. The buyout became a landmark deal because the buyers asked for support from Environmental Defense and the Natural Resources Defense Council before going forward, and then agreed to drop plans for eight of the 11 coal plants.

The TXU deal was compelling evidence that "the importance of the environment --and the real costs of an environmental footprint--are becoming more tangible," Lipschultz said.

KKR won't pay Environmental Defense for its advice. "We do not take payments or contributions from our corporate partners," Ruta said. That's partly because Environmental Defense wants to be free to share its findings with others.

It's also because Environmental Defense wants its primary loyalty to be to the environment, not the client. Said Ruta: "We're going to be pushing for an aggressive program." To top of page

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