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When is the right time to exit an investment?

By Sarah Alexander and Khuram Hussain  |   Posted 19th August 2020

When trying to maximize social impact with limited resources, determining when, and how, to exit an investment successfully is as important as weighing when to enter one. In addition to demonstrating the potential success of impact investing generally, an exit allows the private sector economy to grow without distortion and provides liquidity without dilution to existing shareholders.

The timing of an exit can be more of an art than a science. “Exit at the right time to ensure the company has access to the resources it needs to scale,” observes Hannah Schiff, lead author of GIIN’s report on responsible exits (Lasting Impact: The Need for Responsible Exits). Timing is key since an impact investors’ objectives at exit extend beyond their own financial success to include the investee’s continued access to the right resources, networks and knowledge. Return expectations and structuring aspects like holding periods and ownership stake in the company all play a part, but the outcome can be highly subjective.

As an impact fund with approximately $30 million in risk-capital investments, we at GIF often grapple with this question about when the right time is to exit. For Taptap Send, a peer-to-peer money transfer platform that allows immigrants to send money back home to Africa instantly and at very low prices, GIF has just executed a successful exit from the company at the time of its Series A. GIF’s exit helped bring in new investors into the funding round. It highlights the results of our approach with respect to investing in market innovators—particularly early-stage, high-risk innovations—and mobilizing capital for emerging market business.

GIF was part of the initial cohort of funders that funded Segovia Technology, GIF’s first investment, a software tech platform to streamline payment systems. Our capital helped drive experimentation and the adoption of a new structure for the company’s cash transfer business, which was spun off and became Taptap Send after Segovia merged with Crown Agents Bank.

We could see that in the case of Taptap Send, the growth trajectory of the business proved to be an attractive proposition during its Series A fundraise. Canaan Partners led the $13M round to support the company’s expansion.

The oversubscription of the Series A round is a demonstration of the use of concessionary capital to de-risk early-stage business models. This is becoming increasingly important as the field of impact investing matures into its next phase to accommodates demand for impact investments from a growing pool of commercial investors with disparate risk profiles.

For GIF, seeking to maximize impact rather than just financial gains, the decision to exit an investment involves answering several questions. What is the impact thesis of the company? Where is it on its path to growth? What type of capital does it need to continue growing, while also being focused on preserving and deepening impact? A related consideration is the risk-profile of the investment; as the GIIN report argues, “Impact investments often require patient capital for various reasons, including innovative business models and difficult market contexts.”

Before each investment, GIF dedicates time and resources to assess if its capital can be catalytic to the company’s innovation agenda. This consideration of “additionality” must in turn be calibrated against the potential for a higher long-term financial return, while also enabling new investors to participate in a company’s success. An understanding of the incentives of these investors is important to ensure that impact focus will last through changes in ownership.

When considering a follow-on funding or exit, the primary consideration for GIF is whether the company continues to need GIF’s risk-tolerant and patient capital to grow in a way that preserves impact. It is important to us whether our additionality in terms of both finance and impact remains significant. In this case, we were convinced at the commitment of the existing and new funders to impact and therefore saw that GIF’s capital was better used by exiting and deploying in other riskier and early stage projects.

Impact investing continues to evolve to satisfy the time horizons and return objectives of a wide pool of concessionary and commercial investors. Investors as a whole are still trying to calibrate exactly how and where they can be most catalytic, and equity exits like Taptap Send can help provide a case study on when to exit to mobilize capital for social business.