ESG considerations for investment exit strategies
ESG performance has become a significant measure of business health, value, and longevity, so communicating successful ESG management is vital.
It demonstrates the value of portfolio businesses, the success of investments on exit and maintains a positive perception of both portfolio businesses and investment firms.
Prioritising ESG
Getting ahead of ESG issues and expectations is important in maximising value, increasing returns, and establishing a firm’s reputation as high-quality and sustainable investors. As both strategic advisors and technical consultants, we provide complete support for private equity firms on exit, from maximising value at sale to demonstrating returns to investors.
Sell-side due diligence
Beyond good management, maximising the value of a business means understanding what a potential buyer values and demonstrating that your business reflects their values. Comprehensive sell-side due diligence is therefore vital and should be conducted with a thorough understanding of the market and potential buyers’ priorities. Whether the target buyer is a leader in their industry, expanding into it, or another private equity firm, it’s important to speak to their priorities and be fully prepared to answer their questions.
ESG considerations influence every corner of a business, from supply chain and product stewardship policies, to direct environmental and social business impacts, labour practices, and employee culture. As effective ESG management has been shown to reduce inefficiency and unnecessary losses, ESG considerations have become more significant among these market priorities.
Value protection
From inefficiency to liability, ESG failures are expensive. With possible legal, reputational, and financial costs to ESG mismanagement, understanding the ESG landscape of a potential acquisition is increasingly important in value protection.
Value protection is a priority for buyers and sellers and poor ESG management can impact the value of a business at sale. Identifying weaknesses in ESG management gives private equity firms the chance to identify any failings before they become a problem.
For firms exiting an investment, it is vital to be prepared to respond to any questions or challenges a potential buyer may identify during their due diligence process. With increasing value placed on good management and low ESG risk, this means conducting a comprehensive sell-side review.
Value creation
Sell-side due diligence is also an opportunity to demonstrate and build upon ESG successes. It gives firms the chance to emphasize improvements made, highlight opportunities available, and demonstrate where effective management structures are in place. Preparing a comprehensive report for prospective buyers gives firms the ability to present a complete picture of an asset and its value.
More than a chance to protect value, sell-side due diligence allows firms to demonstrate the value they have added to an investment. Exit is the opportunity to reap the rewards of effective ESG integration and demonstrate the progress made throughout asset ownership. Goals and KPIs used to measure ESG performance can be compared on exit to their earliest implementation, and to industry benchmarks to quantitively communicate the impact of your ownership on business value. The impacts of any firm-level policies can also be identified and highlighted for investors.
ESG management reporting
While exit may signal the end of an investment, it is not an end to the private equity lifecycle. The performance here can significantly impact how firms perform when fundraising for subsequent investments – the next stage of the cycle. Maintaining investor satisfaction is the key to ongoing success throughout the private equity lifecycle.
With investors expecting increased transparency from firms and prioritising corporate and social responsibility and sustainability, good communication of ESG management is vital to the maintenance of investor confidence and to securing capital for future investment cycles. Firms can use the information gathered during sell-side due diligence to produce ESG management reports for current and potential investors. They can present evidence of their responsible investment practices to reassure current and potential investors.
Good ESG at exit
At exit, good ESG management is about good communication. Producing a combination of reports from sell-side ESG due diligence to highlight growth opportunities and maximise brand value, to comprehensive ESG disclosure to meet public market investor expectations, ESG management on exit is vital in securing the reputational health of a firm.
Oriented towards both buyers and investors, intentionally managing ESG at exit can help establish a competitive advantage at sale and demonstrate the high value of both your business and your firm as an investment.
Our approach to investment exit strategies
As your strategic partner, our ESG and transaction advisory expertise can help you identify the ESG issues key to your firm and maximise the impact of diligence and communication at exit. From sell-side diligence reporting to investor relations, we help clients find the best way to communicate their ESG management decisions and successes. Acknowledging that each firm and its portfolio is unique, we can help you create short and long-term value across your portfolio and strengthen your firm’s reputation during exit.
Effectively communicating ESG accomplishments can help:
- Highlight growth opportunities
- Increase brand value
- Establish competitive advantage
- Meet investor expectations.
Get in touch
Contact us to discuss your ESG strategy and framework questions.
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