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The exit phase

Planning for a successful exit should start prior to an investment being made as the GP may need to make early strategic decisions as to how to manage ESG matters during exit.

The focus on ESG issues throughout the ownership phase may be influenced by the proposed exit strategy (e.g. IPO or secondary buyout). This in turn will influence the extent to which ESG risks need to be minimised and/or opportunities for value enhancement proactively managed from acquisition onwards. The portfolio company’s own positioning on the ESG agenda will also play a vital role, as this will determine the nature and extent of the GP’s involvement. This may range from supporting and enhancing existing initiatives to setting a completely new agenda. In addition, as each portfolio company’s exposures are different, it will be necessary to review the exit strategy on a case by case basis.

Please click on the title heading for each graphic to learn more.



Preparing for exit


  • The presentation of material ESG factors (risks and opportunities) should be a consistent feature of any exit process.

  • Establish what the exit strategy is likely to be for any newly acquired investment and consider how ESG matters will impact the chosen strategy and agree with the investment team how ESG matters will be managed during the formal exit planning and exit management processes.

  • Adopting a proactive approach can: help ensure portfolio companies are better prepared; allow sufficient time to complete any time consuming investigations; allow sufficient time to clearly articulate any complex or controversial issues to a buyer (especially well publicised campaigns or criticism), and; help facilitate a smoother exit process overall.

  • If a data room is to be used as part of the exit process, decide what ESG information will be made available and if required commission a third party to undertake vendor ESG due diligence.

  • Secure the services of your preferred ESG consultants early-on (after conducting conflict of interest checks) to ensure that you have the best team behind you (especially in highly competitive processes).

ESG issues and types of exit


  • Ensure the approach adopted is commensurate with the type of exit planned (trade sale, PE, secondary or IPO).

  • For a trade sale, there might be a need for more detailed due-diligence reports prepared by 3rd parties. It is also becoming much more common for buyers to ask questions relating to longer term product sustainability/company preparedness/future proofing (e.g. related to mega trends such as access to water or other resources, or climate change impacts on the business/product).

  • For a PE exit process, the approach will depend on the GP involved, but could require detailed due-diligence reports prepared by 3rd parties. Expect some level of questioning about material ESG factors.

  • For PE secondary exits, expect ESG issues to feature in the investment decision making process and for some level of ESG due-diligence to be performed. The level of detail will vary by type of secondary investment but expect background research on the GP, key individuals and analysis of some, or all, of the underlying companies (and queries arising from this).

  • For an IPO, establish what any listing requirements might be and what post listing obligations will be and plan ahead so that the company is well prepared (e.g. UK Companies Act and carbon footprint reporting). Highlight the material ESG credentials of the business in the IM.

  • Post IPO there will be a greater disclosure obligations on the business so plan ahead to address this reporting element.

LEARN MORE ON REPORTING

Enhanced value


  • Implementing and maintaining ESG strategies during the investment and ownership periods can have a positive impact upon exit with improved ESG performance contributing to higher exit prices.

  • Adopting a robust approach to ESG issue management can be good for market reputation (both for the portfolio company and for the GP) and can also help to support a successful fundraising.

  • LPs are increasingly looking for evidence of sound ESG issue management and evidence of impact in fundraising documentation.

  • Undertake some level of ESG vendor due-diligence (in-house or via 3rd party experts), irrespective of exit strategy, and make use of existing data (e.g. acquisition reports, holding period reports) to verify that material ESG factors (risks and opportunities) have been addressed (or are being addressed) and actions taken can be presented clearly to a buyer.

  • The GP should ensure that salient issues arising from changes in legislation, or in good practice (e.g. PRI LP DDQ, Invest Europe GP DDQ) have been considered as part of the exit planning and management process so that these can be highlighted either to prospective buyers and/or shared with investors post sale as evidence of ESG impact at exit.

  • Capture examples of value creation arising from ESG initiatives (e.g. bottom line impacts and EBITDA from environmental efficiency programmes). Share lessons learnt from the exit process (via a post exit review) across the investment team, and apply across remaining investments.


Top tips
  • When planning the exit allow sufficient time and resources to highlight ESG credentials and mitigated risks.

  • Present information in a manner best suited to the type of exit (e.g. trade sale, PE, IPO).

  • Share lessons learnt from the exit process (post exit review) and apply across remaining investments.

Case study: Palatine

Palatine

A case study on ESG driven change and transformation on the journey to Exit.

VIEW CASE STUDY

 

41%

would be prepared to pay a premium for a target company with strong ESG performance.

Source: PwC Global PE Responsible Investment Survey 2016



14%

of respondents report earning a premium for strong ESG performance when exiting a portfolio company.

Source: PwC Global PE Responsible Investment Survey 2016