Steven van Weede, Managing Director of Enclude
(becoming Palladium Impact Capital in April 2020)
Steven van Weede, Managing Director of Enclude (becoming Palladium Impact Capital in April 2020) shares his unique take on what it means to exit responsibly from an impact investment.
Impact investors go to great lengths to identify and execute investments that have a positive social or environmental impact. But how can they ensure that this impact continues beyond the life of their investment (i.e., after they've sold the asset)? The importance of a “responsible exit” cannot be overstated.
Historically, responsible exits have been to buyers that look and talk like the investors themselves (the vendors), with mission statements that sound comfortingly similar to their own. But beyond merely ensuring the continuation of an investment’s impact, a responsible exit can be an opportunity to identify an owner who is even better placed than the original investor to continue to develop and grow the company’s mission. If we continue to move assets from one development finance institution (DFI) or foundation to the next, we may not be moving the market forward, and risk missing opportunities to give impact businesses the support they truly need.
Here are three steps to achieving a responsible exit that not only sustains the original impact, but actually enhances it further, while bringing new capital into the impact investing market:
1. Set Your Objectives Upfront
The process should always start with establishing objectives. This holds for financial objectives (price), but also impact objectives. Clarity is needed where there is a single seller, but even more so where there is a consortium of sellers – where confusion over ultimate objectives may well lead to friction.
Each vendor should identify what it is the asset needs to be successful. This could be deep pockets (to support future growth), but also management capacity, licenses, geographic reach, specific networks, etc.
Do we feel the new owner needs to be a mission driven organisation, or are we comfortable that the mission is sufficiently embedded into the business model to also consider a more commercially minded owner, who may be able to strengthen the business through complementary knowledge and expertise? Have we considered offering management and employees an opportunity to buy into the business to anchor their commitment and knowledge into continued delivery of impact?
Answering these questions up front ensures alignment and improves our chances for the best possible post-exit outcome.
2. Curate Potential Investors Early and Throughout the Process
As part of early ‘expressions of interest’, make sure to seek information that helps come to a view on the suitability of individual bidders. Ultimately, you want to be comfortable that the new owner will continue with the mission. This can only be credible if such focus makes sense within the strategy of the acquirer. Don’t look at what they say; rather, look at what they do.
Early qualification of investors, and ongoing qualification as you glean more information through the process, allows you to run a process where competitive tension is used to your advantage and where you can be confident in closing the transaction with the bidder that offers the best (financial and non-financial) terms. Where vendors leave qualification of bidders to the very end, the highest bidder is most likely to win, regardless of the consequences for impact.
3. Do Not Rely on Post-Closing Covenants
When documenting the transaction, you can certainly include covenants or other terms that bind the acquirer to the asset’s impact objectives. These post-closing covenants should not, however, be relied on as your sole protector of the mission post-exit. Having a real understanding of the acquirer’s ultimate intentions – based on their strategy and actions – provides a much higher degree of comfort that the mission will be continued, and may even be enhanced.
As Managing Director of Enclude (soon to be Palladium Impact Capital), these steps represent some key learnings over ten years of managing exit processes on behalf of asset owners in different geographies across the globe. Impact investors are looking for opportunities to create change beyond financial returns, and a responsible exit is key to making that change endure.