By Elizabeth Boggs Davidsen
Elizabeth Boggs Davidsen is chief of the Multilateral Investment Fund's Knowledge Economy Unit, which seeks to cultivate the driving forces of the new economy--technology, innovation, and entrepreneurship--to promote inclusive growth and job creation in Latin America and the Caribbean.
There is increasing momentum behind impact investing--the global movement of investors, development agencies, entrepreneurs, and philanthropists working to realize financial, social, and environmental gains.
In Latin America, capital committed by impact-investment funds increased to roughly $2 billion by the end of 2013, from $160 million in 2008, representing a 12-fold growth in just five years. Fourteen to fifteen firms have entered the impact-investing space in Latin America every two years since 2007, according to a new study produced by the Aspen Network of Development Entrepreneurs (ANDE), in partnership with the Latin American Private Equity & Venture Capital Association (LAVCA) and LGT Impact Ventures. Mexico, Brazil, and Colombia are leading the movement, but Argentina and other countries throughout the hemisphere are following fast. The forces behind this regional momentum are in some ways similar to those that propelled the rise of impact investing in Europe and the United States eight years ago.
As David Hutchison of the United Kingdom-based non-profit organization Social Finance commented, "People woke up after the financial crisis and realized how they invested their money was an important consideration."
- Brazil. The political corruption scandal and financial crisis have given rise to a new wave of social investment activity in which corporate foundations, wealthy families, and high-net-worth individuals are moving to fill a gap left by the government. In August, the Instituto de Cidadania Empresarial (ICE) and Vox Capital hosted the 2nd Brazilian Forum on Social Finance and Impact Business in São Paolo that attracted more than 800 participants from the Brazilian social finance and impact business ecosystem.
- Colombia. The business community has also propelled itself into social investment activities, stepping in to provide services the government was not able to deliver because of years of civil conflict. Colombia also launched the first Andean-based impact-investing fund in 2011, Inversor, which has invested in companies targeting the base of the socioeconomic pyramid in the food, hospitality, green construction, and recycling sectors.
- Argentina. An economic renaissance has been taking place since market-friendly President Mauricio Macri became president in December 2015. New reforms are underway to improve the investment climate, and the improvements have not been lost on Argentina's social entrepreneurs, who are organizing and launching new initiatives, including Njambre (a Spanish term for "swarm"), a new social accelerator that is attracting the attention of international donors and local partners.
While impact investors in Latin America originally came mainly from outside the region, there is an increasing shift toward locally created and developed impact-investment funds. The first was Mexico's Ignia Fund, which started operations in 2009. Vox Capital was launched later that year in Brazil, and became the country's first investment vehicle with a specific mission to alleviate the problems that plagued the country's education, finance, and health sectors, while at the same time generating financial results. Adobe Capital followed in 2011, launched out of New Ventures, Mexico's leading social and environmental accelerator.
These and other first movers have laid the pathway for the more than 40 locally originated funds now headquartered in the region.
Despite this momentum, collective action is needed by governments, development finance institutions, and large companies to provide funding and create the right incentives for impact investing. Crucial ingredients are still missing from the impact landscape, such as the institutional infrastructure needed to support the marketplace. Deal flow lags behind investor demand: about 70 percent of impact businesses are startups and not yet profitable, entrepreneurs lack sophistication in pitches and accessing talent, and measuring the social impact of investments is still a work in progress.
The Spanish technology firm Telefónica, through its Open Futures Program, and the Multilateral Investment Fund (MIF) of the Inter-American Development Bank Group are actively working to address these challenges using grants, equity, and debt instruments to build the ecosystem and propel impact investing into the mainstream. The aim is to help build a pool of investment-ready social enterprises by strengthening intermediaries--such as incubators and tech and social accelerators--and providing catalytic grants, equity, and increasingly flexible financing tools to seed funds, and to help enterprises validate their proof of concept and measure their social and financial returns.
Telefónica, the MIF, and many other players are capitalizing on the private sector's growing appetite for channeling social change, especially millennial entrepreneurs. A recent study by The Economist Intelligence Unit reveals that 87 percent of millennials worldwide believe that business success should be measured by more than just financial gains, and 93 percent believe that social impact is an essential element of their investment decision.
All of this is good news for Latin America. Social entrepreneurs from around the world are providing valuable insights and further propelling momentum in the region. Mobile-money solutions from Africa, diagnostic-health solutions from Asia, and renewable-energy models from Eastern Europe are all making their way to Latin America's impact-investing entrepreneurs:
- One of Vox Capital's portfolio companies developed software to address the asymmetry of information between high- and low-income patients in the Brazilian healthcare market.
- A company supported by Inversor developed methods for "green" wall and roof construction in urban settings.
- Adobe Capital is funding SalaUno, a health care social enterprise, offering laser cataract surgeries from India to low-income people in Mexico.
- In the Ignia Fund, a portfolio company is using proprietary risk technology to offer short-term loans to unbanked Mexicans.
From the Multilateral Investment Fund Trends blog