Four principles provide actionable guidance for wider investment community throughout the investment cycle, from pre-investment to exit.
The 2X Collaborative, a global industry body promoting gender lens investing, has published guidelines for exits from equity investments in gender lens investment (GLI) funds.
The Principles for Responsible Exists in Gender Lens Investing have been built with practical insights from both investors and female entrepreneurs from across global markets, including members of the 2X Collaborative, to help GLI funds ensure that the impact of their investments is preserved and scaled post exit.
Responding to questions from Impact Investor, Jessica Espinoza, CEO of the 2X Collaborative explained the principles were aimed primarily at fund managers and fund investors but that they were also relevant to the broader investment community.
She said: “During the co-creation process, we intentionally broadened our horizon beyond traditional venture capital and private equity and also looked at private debt and innovative finance models, making the principles relevant for a broad spectrum of capital providers.”
Espinoza said 2X Collaborative’s research among investors and gender-smart entrepreneurs also revealed the important role that intermediaries such as investment banks and advisers played in ensuring responsible exits in gender-smart investing.
The 2X Collaborative said it would be collecting further feedback and input on the actionable guidance and toolkit accompanying the principles over the coming weeks as well as adding case studies, practical examples and other interactive content, to ensure it remained relevant in line with emerging good practice.
Investment life-cycle approach
Although the main objective of the principles is to provide guidance for investors preparing to exit a company, each principle also provides actionable guidance pre-investment, at the time of investment and during investment.
Espinoza said that like conventional investing, you had to start thinking about the exit before entry. She explained that research had shown that in gender lens investing the disconnect between the entrepreneur and the investor’s expectations was often most evident at the time of exit when it should have been apparent from the outset. “This is why alignment on exit has to start at the very beginning of the investment cycle,” she said.
She also explained that given that gender lens investors went the extra mile to generate positive gender outcomes with their investments throughout their holding period, the question of how these positive gender outcomes could be sustained beyond exit was a crucial question to tackle throughout the investment life cycle.
“One way to do this is by codifying gender-smart practices in a way that outlives the exit of the investor and, as the case may be, the founder,” she added.
The four principles include two internal principles committing investors to ensuring that gender is one of the key value drivers of the investee company and to standing behind the female founders and leadership team, and two external principles in which investors commit to challenging gender biases in valuations of the female economy and ensuring buyer’s gender alignment at the time of exit.
According to the 2X Collaborative, with few GLI funds in the emerging markets reaching the exit stage – given that the majority have been launched in just the past five years-, lessons could be learnt from exists in more mature developed market funds.
“Examples from more developed markets like California or Singapore offer a cautionary tale for more nascent markets where gender lens portfolios are yet to reach the exit phase,” said Espinoza.
As well as responding to demand from investment practitioners for guidance on exits in gender-smart investing, the principles also respond to concerns from female founders and gender-smart businesses, who Espinoza says are facing practical challenges of investor alignment around desirable exit routes as well as different forms of gender bias.
“This includes both unconscious bias in valuation both at entry and at exit, or the constant fear of being pushed out of their leadership position as they get diluted and have to give up control,” she said. “We firmly believe that to unlock the full potential business and impact case of gender-smart investing, the field must pay greater attention to exits which often influence everything else.”
Growth in gender lens investing
The 2X Collaborative defines gender lens investors as investors who have gone the extra mile to build a portfolio of enterprises that create women’s economic empowerment outcomes through female representation in business ownership, leadership, among employees and suppliers, as well as through products and services benefitting women.
According to a recent report, 67% of asset owners globally identify gender diversity as an area of interest within their investment portfolios and a whitepaper by the Wharton School of the University of Pennsylvania, published in December 2021, estimates that currently 206 private equity and venture capital funds deploy capital with a gender lens, totalling $5.4bn (€5.2bn) in assets under management with a total of $13.2bn (€12.7bn) targeted by these funds in their ongoing fundraising.
“Momentum in gender-smart investing is rapidly growing among the spectrum of capital providers across asset classes, sectors and global markets. We anticipate these principles to be relevant for a rapidly growing spectrum of investors who are joining the global movement to become gender-smart,” said Espinoza, adding that no matter the investment strategy “these principles provide guidance on what good looks like when it comes to gender-smart exits.”