Most impact investors who have worked hard to help companies and projects generate positive impact want some assurance that the impact they have nurtured will continue and grow after they exit the investment.
A new report from the Global Impact Investing Network shows that the maturation of both the field and investors’ portfolios has drawn increased attention to exits, especially how investors try to safeguard the continuity of impact beyond exit.
The report says various risks associated with exit — such as those related to mission drift and business failure — can be mitigated with a responsible exit that ensures the investment makes a lasting impact.
“Impact investing has huge potential to generate positive long-term outcomes for society and the environment,” GIIN research director Abhilash Mudaliar said in a statement. “But investors need to have the confidence that they will be able to exit responsibly.”
On the basis of some 30 interviews with investors and entrepreneurs, GIIN shows that investors employ strategies throughout the life of their investments to ensure the sustainability of the impact that they seek to create.
Pre-investment: To increase the likelihood of continued impact after exit, investors often select investees based on whether impact is embedded in their business model or bound to financial success. They try to understand the business’s likely growth trajectory, which has implications for which exit paths and options will become available. They also consider founders’ commitment to mission.
At the time of investment: The structure of the capital provided can influence whether a business will be able to follow a sustainable growth path that leads to long-term success, because factors such as time horizon for return or repayment influence business decisions.
Also at this stage, two other considerations arise: alignment with co-investors on impact and growth strategy and the inclusion of language on impact in legal structures and documents.
During investment: Some investors work with investee company management to inculcate positive policies and practices for the long term, such as those that govern employment, sourcing of raw materials or customer service.
At the time of exit: Timing is key at this critical phase, since impact investors’ objectives at exit extend beyond their own financial success to include a company’s continued access to the right resources, networks and knowledge.
A related consideration is to select the right buyer — one who not only offers resources for the investee to grow and improve but also understands the value in the business model and shares a vision for growth alongside sustained impact.
The GIIN report includes four case studies that provide in-depth examples of responsible exits from impact investments and lessons learned by the investors.
- Investment in Natgas, an alternative energy company, by Mexico City-based Adobe Capital, whose mission is to have positive impact by supporting socially and environmentally impactful early- and growth-stage entrepreneurs in Mexico
- Investment in an Indian microfinance institution by Lok Capital, a private equity fund manager
- Investment in a 1,050 acre Bozeman, Montana ranch by Beartooth Capital, a real assets investment firm that targets conservation and market-rate financial returns
- Investment in Express Life, a Ghana-based life insurance company, by LeapFrog Investments, a private equity firm that invests in financial services and healthcare companies targeting underserved and low-income populations, primarily in Africa and Asia
— Check out Will Advisors Finally Embrace ESG and Sustainable Investing in 2018? on ThinkAdvisor.