The objective behind an investment by a Corporate is to realize optimum return on its investment portfolio over the life cycle of an Investment. Hence, decision with respect to the appropriate time when investment need to be exited and the exit price plays a very crucial role.  This is the reason why every investment is planed with an appropriate exit strategy to maximize return

Today’s investment options are extensive and broad ranging, including relatively straightforward efforts to multi-year / multi-stakeholder initiatives. While doing any or all of these could yield significant benefits, it is often unclear which will generate the greatest, most enduring value. Faced with this dilemma, companies often struggle to maximise the portfolio returns.When considering the investment structure, investors should consider precisely what the capital structure will look like when all securities are unwound and how this structure sits with the exit timetable.

Investments in securities are at times undervalued by the market, providing the prospect of greater appreciation in value than the securities of more financially stable companies. Market undervaluation in relation to fundamental value may be the result of several factors, including: (i) difficulties in conducting thorough financial analysis on a troubled company; (ii) the presence of complex business situations; and (iii) the general lack of reliable external sources of information, such as research reports or market quotations, on many companies. Market undervaluation can also occur as a result of market overreaction to news and sector disfavor. Corporates may therefore focus on companies experiencing operational difficulties, but with adequate historic revenues, which suggest a need for capital and management improvement, and on turnaround have potential of providing good valuations. To achieve this value-add the corporates need to actively structure the investments and enhance the returns and maximize value upon exit.

The factors that managements assess in deciding whether or not to monetize an investment portfolio include:

  1. Economic Environment
  2. Regulatory Requirements
  3. Competitive Landscape and Investee’s Positioning
  4. Future Value Proposition and Growth prospects of the Investee Company
  5. Investment time horizons and return expectations of other shareholders

Several exits routes are available to monetise the Investment through Initial Public Offering, Secondary Sale Transaction, Buyback and Capital Reduction. Companies need to have a sound Divestment plan to ensure maximisation of Returns

In order to achieve the monetisation objective, periodic analysis of the Investments should be conducted to assess company’s growth prospects, internal resources, competitive positioning, and valuation met­rics etc.Making a practice of review can help a company stay on top of valuation trends and evaluate the risk/reward scenario. The ultimate goal of any investor is to generate a suitable return. In order to do so, however, not only must the underlying business perform but the exit route to realise that return must be effective.

Further Corporates also need to review the holding cost for the investments. The expected funds availability and requirements and its cost of funding has a direct impact on the decision to monetize the investments. Also Corporates cash out profits on investments, but are often unwilling to book losses on investments of companies that are not performing too well or are incurring losses resulting into loss of time value and opportunity cost

Tax incidence is also an important factor to decide the exit period and methodologies given the differential tax treatment. Tax considerations to ensure an efficient structure for realising value will always be key to any exit. Given the competing priorities, tax concerns will frequently drive a need for greater complexity in the investment / exit structure — particularly given that other interested parties may not have tax positions that are aligned.

Performance of the Investment Portfolio is becoming increasingly important for Boards and Shareholders given the detailed reporting requirement in the Financial Statement who demand positive returns from the Investment Portfolio

In the ever dynamic economy, there will be even greater stakeholder scrutiny to ensure divestments are efficient, effective and executed strategically to extract maximum value and support the longer-term growth agenda of the business

Ravi Sikeriya

Vice President, Finance & Accounts with IL&FS Financial Services, based at Mumbai

Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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