Preparing for a successful exit: Sustainability should translate into a premium

A successful exit requires thorough understanding of the current trading of the investee and its future business prospects. Ideally, a new investor should bring in something new that the incumbent owners don’t possess. This can be experience on scaling-up similar businesses in other geographies, large financial or human resources, industry expertise, good brand or something else laying favourable grounds for future growth and operations.

Finnfund as a development finance institution pays special attention to sustainable business practices of its investees. Finnfund often supports investee companies in making their businesses more sustainable. This often is achieved through client-specific action plans on improving and enhancing company performance in environmental and social dimensions of operations. Finnfund’s environmental and social experts provide guidance and help in these efforts.

Positive impacts must be preserved

When exiting an investment, you will need to have your house in order. This means not only operational and financial performance, but also sustainability. Finnfund pays special attention to the commitment of the acquiror to develop the business further and maintain the sustainable business practices achieved at the investee. For Finnfund, it is important that the positive impacts achieved are preserved and hopefully scaled up as the business continues to grow. We also have seen that our investees operating a sustainable business are well positioned to grasp opportunities with overseas companies as sustainability of global supply chains has become increasingly important. We also envision that this sustainability should translate into a premium at exit.

A key component of a successful exit is of course the consideration. Sometimes the perception is that financial returns are not important for development finance institutions. This is not the case at Finnfund as healthy financial returns are an important way for us to grow and expand operations. Finnfund’s increasing cooperation with impact-minded private sector investors also necessitates appropriate returns for investments.

Exit to reinvest

An exit also allows Finnfund to recycle the capital to new investments. Development finance institutions provide patient capital, however when operations have become stable and another kind of investor (whether financial or industrial) is the best partner for future path, it might be the right time to exit and reinvest the proceeds to a new sustainable business proposition at an earlier stage of development. Waiting for the top-notch valuation rarely yields any good results, and it often makes sense to grasp an exit opportunity from a sustainable acquiror at a reasonable valuation.

Mikko Kuuskoski
Associate Director, Investment Operations

The text was originally published in Africa Global Funds magazine, May 2022 issue

Mikko Kuuskoski Head of Portfolio Management mikko.kuuskoski@finnfund.fi