Impact investing in Latin America for ongoing deployment of capital across the spectrum of financial returns and impact expectations
By Monica Vasquez Del Solar, Head of Business Development and Partnerships at Social Nest Foundation
The eleventh edition of the Latin American Impact Investing Forum (FLII) showed a thriving Latin America well on its way to becoming an impact investing juggernaut at global scale.
Over 700 people from 25 countries gathered in Merida, Mexico, to inspire and connect with one another with the stated intention of generating social and environmental impact through business. Though the intentionality of creating impact is what makes this sector special, in order to bring about large-scale change, the logic of intentionality must permeate the business world at all scales and become the norm. Progress has indubitably been made toward completing this transition in Latin America, though much still remains to be done. Latin America is the target for $3.7 billion in assets under management for impact investing¹. The investments, however, are centralized in certain sectors such as agriculture and microfinance, and even though 2018-2019 pointed toward greater mobilization of capital in small investments (under $500,000), these have been in already established small companies, and not in new early-stage business models².
Following our participation in FLII 2022, we would like to share some thoughts and what for us have been the meeting's most noteworthy takeaways:
→ The size of the business solutions and volume of capital that needs to be mobilized in Latin America must be stepped up in order to meaningfully help find solutions to the most pressing issues affecting the region. This means positioning impact investing beyond the world of "entrepreneurship", i.e. beyond the early stage. The more impact enterprises scale up, the greater their influence on the economy, and therefore the more feasible the transition to a better world for all. It is at that stage, however, where the major funding gap in the region lies. Building a pipeline of "investment ready" companies for existing capital in the region requires accelerating capital mobilization into the early stage. In the so-called "missing middle": companies too big for microfinancing, but too small for private equity.
→ To make capital accessible for that stage entails a paradigm shift in two crucial aspects. The first, the inclusion of the three components of profitability, risk and impact, with an eye toward investing not only in the best performing companies but also in those that most positively impact society as a result of said performance. The second, the inclusion of a systemic viewpoint, since many problems affecting Latin America are systemic issues and as such demand systemic responses. This gives capital managers a great opportunity for innovating in how financing structures and investment mechanisms get designed to tackle these problems. This also means a more interactive dynamic among the various stakeholders across the spectrum of capital provision in the region.
→ While some impact enterprises can indeed be highly profitable, for many, just ensuring that all three components (financial market return, low risk and significant impact) are present and demonstrable can itself be a challenge. Consequently, it is important for new actors with lower risk aversion, greater flexibility in returns and high motivation for impact to step in as a catalyst.
→ Within this framework, blended finance strategies using public or philanthropic capital to incentivize private investment in emerging countries need to be used more frequently in order to structure the investment vehicles that will finance early-stage business models with a more systemic approach, thus mitigating the perception of risk while simultaneously getting them ready for commercial investment. This kind of catalytic or concessional capital that might lessen financial return as a tradeoff for boosting impact is what needs to be mobilized (at least at the early stage) on a large scale and for different investment strategies.
→ Attracting impact capital to Latin America - whether it be catalytic or with market return - is a challenge, but just like any innovative initiative, it is also a great opportunity. The boom in ESG investment on a global scale has materialized in new investment practices proving there is appetite for adding to the financial returns of today's investors. While the current generation has already shown this evolution to be true, it stands to reason that the next generation of investors might go even further and lead the impact revolution in the financial world. That is an opportunity that must be seized upon.
→ Generally speaking, high net worth individuals and family offices play a key role in that revolution because of their flexibility and agility when it comes to decision making, in addition to the possibility of setting investment goals independently. It is the younger members, however, the so-called Next Gen between 25 and 45 years of age, who feel more drawn toward aligning family wealth with their values, and who are more attracted to impact investing than previous generations might have been. This shift in mindset among equity owners will undoubtedly lead to a new investment paradigm.
For all these reasons, Social Nest Foundation seeks to encourage the mobilization of capital in Latin America through our Fi Impact Investing initiative, which sets out to inspire, educate and connect capital holders and managers, the Next Gen in particular, and European philanthropic foundations with regard to the impact investment opportunities in the region by connecting both continents and creating collective learning processes. Through training programs, events and fact-finding, we will position the need to deploy capital across a continuous spectrum of return and impact appetites, and under the premise that existing gaps can be filled by mixed financing structures and instruments, where new stakeholders can play a key role.
In that sense, we believe it is crucial to understand the ecosystem of global impact investing as a cog in which all stakeholders are important. The landscape of actors (entrepreneurs, incubators, accelerators, equity holders, capital managers, regulatory bodies) need to interact and collaboratively build new meanings and new practices that can be scaled up and long lasting.
The first of our Fi actions planned for this year will be held in Amsterdam on June 15, a meeting of selected funds and startups that are helping solve the most pressing social and environmental problems in Spain and Latin America and individual European investors and family offices, with the aim of connecting the latter with real investment opportunities and giving them first-hand knowledge as to the experience of private investors who are already deploying capital in the region. If you would like further information about the Fi Gathering Amsterdam and other upcoming programs and events, you can subscribe to our newsletter here.
¹ ANDE surveyed 83 investors with assets under management directed toward impact investing in Latin America totaling $3.7 billion. In 2018-2019, these investors deployed over $600 million across 619 deals. This does not include investments made by international development institutions.
² Report: Impact investing in Latin America. ANDE. 2020.