Responsible exit

In short

A high degree of collinearity is one of the most effective mitigants for post-exit impact risk. When seeking a new home for a portfolio company, it is important to consider qualitative differences between exit partners (buyers) and any potential residual impact risks. Vidia has developed a responsible exit policy to address these concerns. The policy ensures that post-exit impact risks are managed effectively, drawing on a qualitative analysis of the explicit and implicit impact intent, alongside other ESG risk and compliance considerations.

Why a responsible exit policy is needed

The timing and valuation of a portfolio company’s exit determines the financial performance of a private equity fund. Unfortunately, some private market impact funds are confronted with the issue of a poor post-exit impact performance under new ownership. A commitment to the “Impact Principles” (the best practice in impact management) explicitly requires its signatories to align with Principle 7 “Conduct exits considering the effect on sustained impact.“: “When conducting an exit, the Manager shall, in good faith and consistent with its fiduciary concerns, consider the effect which the timing, structure, and process of its exit will have on the sustainability of the impact.”  A key instrument to facilitate a “responsible exit”, where post-exit impact risks are effectively mitigated and managed, is to ensure a high degree of collinearity, i.e. a close correlation between a portfolio company’s enterprise valuation and its impact performance. Collinearity reduces exit impact risks because the enterprise is valued based on the sale of impactful products and services. Buyers usually intend to enhance the portfolio company’s economic value creation. However, residual risks remain if a buyer’s misaligned strategic priorities or poor post-merger integration can lead to a decline in the portfolio company’s post-exit impact performance.

Example for a responsible exit policy 

At Vidia, we ensure a particularly high degree of collinearity through our impact due diligence process and well-defined positive screening criteria. In addition, we have established a responsible exit policy to help us effectively mitigate and manage possible residual post-exit impact risks. For example, our choice of exit partner (or buyer) shall be informed by a qualitative, comparative assessment of the potential buyer’s “climate solution strategy”. The policy focuses on the following aspects:

1. Explicit intent: the stated purpose of the acquisition 
2. Implicit intent: the strategic value of the acquisition target to the buyer’s business
3. Wider post-exit ESG risks and compliance considerations

When bid values are relatively similar, everything else being equal, we prioritize potential buyers who are more aligned with our climate solution strategy. On the other hand, if a bidder significantly exceeds all other bids but is exposed to significant post-exit impact risk, Vidia reserves the right to consult with its limited partner advisory committee (LPAC) before taking a final decision. In the context of PE exits, it is important to keep in mind that the selection of exit partners is constrained by asset managers’ fiduciary duties, although a high degree of collinearity significantly reduces the risk for a possible trade-off situation.

So what

While many impact funds are committed to a responsible exit policy, there are only few examples of similar policies in the public domain. A high degree of collinearity might render it unlikely, yet the possibility of a challenging trade-off between fiduciary duties and a preferrable exit pathway with better impact risk management needs to be considered. Within the boundaries of reasonable fiduciary duty requirements, Vidia’s responsible exit policy clearly articulates a preference for exit pathways with lower post-exit impact risks.