Building a Portfolio

Exit Strategies for Investors: 4 Steps to a Responsible Exit

For impact investors, the appeal of a specific investment is more than its potential for returns—it’s also the positive change it can make. To make sure that positive impact continues over the long term, though, it’s important to consider exit strategies for investors.

A report from the Global Impact Investing Network highlights the issue and provides concrete steps for making a responsible exit, based on interviews with nearly 50 impact investors, as well as several case studies and a review of literature. “Since impact investors by definition seek to generate social or environmental impact alongside financial return,” the authors write, “they tend to also be interested in the durability of that impact after they liquidate an investment.”

The following four steps may help ensure an investor’s exit avoids unintended consequences on the investment’s mission.

Make the Ultimate Exit an Initial Consideration

Responsible exit strategies for investors require forethought and planning far ahead of the exit itself. In fact, the exit is a factor that investors should consider before even selecting an investment.

Vetting a company for impact investment should include an examination of the organization’s planned growth trajectory and an understanding of where a logical exit might occur.

Structure the Initial Investment Properly

The method of investment can have a significant impact on the investor’s ability to exit. Private equity investments with a short time horizon for returns, for example, may not be ideal for all impact investors. To exit, private equity investors must be bought out. Unless the exit is facilitated by an IPO, private equity investors must wait for an appropriate buyer. Therefore, they may have less control over their exit than investors working in other asset classes.

Debt investments can work well, note the authors of the GIIN report, since there’s a natural exit when the loan is fully repaid. “Debt investments also avoid equity dilution; maintaining founder ownership can help ensure the continuity of impactful practices.”

Implement Practices that Will Outlive the Investment

Throughout the life of an investment, impact investors can work with stakeholders in the organization to create best practices and policies—around everything from organizational processes like hiring to mission fundamentals like sustainability—that may improve the company in the near term and set it up for post-exit success. Knowing that the organization will be able to carry on effectively can make it easier to exit.

Exit Efficiently

Ideally, investors can give themselves some flexibility around their exit, enabling them to maintain continuity of management and vet potential buyers to make sure they’re aligned with mission goals. While some of the investors interviewed for the GIIN paper said that they attempted to contractually require management to adhere to agreed-upon goals, most said that such methods were fairly ineffective.

The report authors cite the timing of the exit as one of the most important factors in an investor’s success. “Like the achievement of financial or growth objectives, the achievement of impact objectives may signal that the investment has completed its intended goals,” they write. “[I]f so, it may be time to exit.”

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