Impacting Investing Report Promotes A Responsible Exit

A new report hopes to help impact investors safeguard the sustainability of their impact beyond exit by offering insight into a number of practical strategies.

Lasting Impact: The Need for Responsible Exits, published by the Global Impact Investing Network (GIIN), examined the strategies available for impact investors to ensure there is long-term impact after removing their capital from an investment.

The report stated that the impact investing field had “grown in size and sophistication over the past decade”, and investors’ portfolios had matured along with it, which had resulted in greater emphasis on exits.

One of the study’s central questions was: “Does it matter, in terms of impact, how you exit an impact investment?”. This report argued, “it usually does matter, because impact investors seek to create sustained, positive impact through their investments, even after exit”.

According to the 2016 Annual Impact Investor Survey, more than 80 per cent of impact investors believed they had a responsibility to try to ensure continuity of impact after exit.

GIIN research director Abhilash Mudaliar said there were more exit approaches than investors may be aware of.

“Impact investing has huge potential to generate positive long-term outcomes for society and the environment,” Mudaliar said.

“But investors need to have the confidence that they will be able to exit responsibly.

“There are many more exit approaches to meet financial objectives and ensure sustained impact post-exit than investors may be aware of.

“This report should provide impact investors with proven strategies that they can use to exit their investments in ways that won’t jeopardize the impact they seek to create.”

According to the report there are a range of risks associated with exit—such as those related to mission drift and business failure—which a responsible exit can mitigate to ensure the investment makes a lasting impact.

The report provides in-depth examples of responsible exits from impact investments in case studies from Adobe Capital’s exit from a natural gas conversion company, Lok Capital’s exit from a microfinance institution, Beartooth Capital’s sale of ranchland, and LeapFrog’s exit from an insurance provider.

It also draws on insights from interviews with more than 30 investors and entrepreneurs to reveal strategies to strengthen an investors ability to meet liquidity objectives and ensure the long-term impact of their investments.

It found that investors employed strategies throughout the investment lifecycle – pre-investment, at the time of investment, during the investment, and at the time of exit – to ensure the sustainability of the impact they sought to create.

According to the report prior to investing, many impact investors seek to understand whether impact is deeply embedded in company business models or operational practices.

Practitioners also factored lasting impact into the structure of their deals with aspects such as time horizons and repayment conditions often influencing investee strategy and growth expectations in ways that could affect sustainability.

Once invested, some investors worked with company management to instil policies and practices that ensured positive impact continued into the long-term.

The report also highlighted that specific decisions at the time of the exit affected impact, including timing the exit, retaining investee management, and selecting aligned buyers.

“Different investors use these approaches in different combinations,” the report said.

“The present diversity of approaches notwithstanding, there is general consensus among investors that exits should benefit many stakeholders, including customers, employees, entrepreneurs, the environment, and investors alike.

“This calls for further, careful thinking in the field about exits to ensure they do so. Maintaining the centrality of impact throughout all stages of the investment process can help deliver on the promise of impact investing: to generate positive outcomes for society and the environment through the allocation and management of capital.”

Mudaliar said he urged investors to read the report “as inspiration for considering their role in creating long-term, wide-reaching, positive impact”.

“Investments, after all, are made for the future,” he said.

“As the impact investing industry grows and investors gain more experience with exits, the practices explored here will continue to develop, and new practices will also emerge.

“It is our hope—and belief— that the development and adoption of such practices will lead to better assurance of long-term impact, which is vital for the industry and the world.”