Rodney Schwartz: An exit strategy should be in place much earlier

The financial destination of enterprises that gain a foothold thanks to social finance is often overlooked, writes our columnist

Rodney Schwartz
Rodney Schwartz

Barely a week goes by without the arrival of an innovative, exciting enterprise in the impact investing world. At ClearlySo we mentor, advise and promote companies until they can set sail and spread their impact far and wide. Occasionally the companies have to put into port to replenish their coffers, take on supplies and repair a few leaks. But our job is to do all we can to make sure these enterprises don't sink along the way. Anyway, enough of the nautical metaphors.

Most enterprises have various goals, missions and key performance indicators, and achieving these is what makes them exceptional. But what is far too often overlooked is the financial destination for many of these companies once they achieve scale and stability. In July, we saw what we believe is the world's first successful exit of a high-impact business from equity crowdfunding after Europcar bought E-Car Club, a car-sharing club that uses electric cars. This acquisition has set a benchmark for future equity exits.

July also saw another impact investor success story when the disability charity Scope repaid the £2m that it borrowed from investors in 2012. As the first major charity to launch, utilise and repay a charity bond, Scope has proven charity bonds as a tool to raise additional capital and increase its impact.

Unfortunately, examples such as these have been few. Impact investing is still in its infancy and most deals are medium to long term and haven't realised significant returns yet. Perhaps this explains why exits and building bridges to secondary markets have been consistently overlooked.

It was unsurprising, then, to read in the JP Morgan and Global Impact Investing Network study Eyes On The Horizon earlier this year that investors put "difficulty exiting investments" as the third biggest challenge to the growth of impact investing.

Admittedly, this barrier is still eclipsed by the top two challenges: a lack of appropriate capital across the risk/return spectrum, and a shortage of high-quality investment opportunities. The impact investment industry is relentlessly trying to solve both of these. However, more attention is required to establish viable exit routes for those companies and investments that are coming of age. For example, is listing on Aim, the London exchange for smaller companies, viable, given the heavy up-front and ongoing fees? Good Energy, the green energy supplier, has shown this approach can work: its share price has doubled in three years on Aim.

Can secondary markets flourish and produce the sort of liquidity investors crave? Capital for Colleagues, a new entrant last week on the Social Stock Exchange, shows continued growth and demand from companies to achieve scale. But can such sector-specific platforms entice the type of investors these businesses need in the long run?

Perhaps clearer thinking about the exit strategy even before the investment is made is the missing ingredient to opening up liquidity, attracting capital and building deal flow. By plotting a distinct route from one port to another at the start of an organisation's journey, we can go some way to solving an important challenge to investor confidence and sector growth.

Rodney Schwartz is chief executive of ClearlySo, which helps social entrepreneurs raise capital

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