October 18, 2023
Decisions regarding divestment: that’s not something VP Capital takes lightly. "But it is a precautionary measure when we sense that the management of a particular company is not, or insufficiently, engaged in sustainable change", says Guus van Puijenbroek, Director Strategic & Family Matters at VP Capital.
When we invest in a company that still has a long way to go in terms of sustainability, we give them five years to take substantial steps. “In doing so, it must be clear that management sees sustainability as a priority. We also help them on their way, which is our added value as an investor. For example, the consultancy firm that calculates our Progress Scores, helps our companies to create a roadmap for a five-year period. The roadmap contains concrete objectives and corresponding KPIs. The goal of that roadmap is to make our investment a frontrunner. For us, frontrunners are those companies that achieve a Progress Score of at least eight out of ten. That means a minimum of three out of five on impact (acts to avoid harm) and in that case five out of five on ESG (where they do noticeably better on ESG than their competitors) or four out of five on both impact and ESG. The scores are reviewed annually in consultation with the companies.”
If we see little or no improvement after five years, we will consider to divest. “As a long-term investor, we have no predetermined exit horizon. Therefore, we never take a decision to divest lightly: we always look at all solutions before making an exit.” We do make an exception for companies that are not making sufficient progress because the technology to make them sustainable is not yet available. Farms – agriculture is a sector in which adjustments take longer – are given ten years. We also give companies that are restructuring more time. Over the years, we have made one deliberate divestment. “At the time, the management of that company had no strategy on sustainability. We therefore decided to part ways with this company.”
VP Capital does not always call the shots. “When you invest in funds, you are bound by the lifetime of that fund. You have to ride it out until it reaches maturity. However, if sustainable progress is not fast enough, we can decide not to participate in a new capital round or fund of the same fund manager. This will therefore take longer compared to when we invest directly in a company."
“You also can't screen funds that thoroughly. After all, when we subscribe, there are often no companies in that fund yet. We have to rely on the view of the fund management and the fund conditions. We will have the management team sign a letter of engagement stating that they must actively work on sustainability and report transparently to us on their progress. Having sustainability clauses included is difficult because the fund conditions must be uniform for all investors. If the process of incorporation of a new fund is at an early stage and the fund terms are still being drafted, we aim to link fund managers’ carried interest to impact objectives. Sometimes this works, but often it doesn’t."
And there are other reasons to divest. “As mentioned, we do not decide up front when we will exit a company. There are, however, specific situations when we may consider to sell our stake. I’m thinking of, for example, an offer we can’t refuse or if we feel the company is a better fit for another shareholder that can take the investment to the next development phase. We can then put the capital released in this way into new sustainable projects. We carefully consider the buying party to ensure a responsible exit.”
And what if a sustainable business is not profitable? “Fortunately, we have not experienced that very often, especially since the introduction of our sustainable investment strategy. One company did go into liquidation, so we had to part ways with it. There have been two occasions in the past where we disagreed with the strategic choices of the management or the other shareholders. When capital had to be raised again, we did not want to go along with that and decided to part ways. But those are exceptional cases.”
Divestment is therefore not a common practice at VP Capital. "But it is a valid strategic option for us if we find that the sustainable progress of that particular investment is insufficient. That choice ultimately benefits the sustainable progress of our portfolio and ensures the necessary innovation to take place.”