Scaling the Impact Investing Sector in Latin America - Perspectives from TBLI CONFERENCE™ LATIN AMERICA 2015

Guest Blog Post written by Celina Lesta during TBLI CONFERENCE™ LATIN AMERICA 2015. Views and opinions are that of the writer and are not the official views of TBLI CONFERENCE™.

Impact investments have been taking place in different regions of the world for many years now. If financed, many social entrepreneurship, SMEs and NGOs could scale their impact providing solutions to social problems while creating profit.  What is the situation in Latin America? What is missing in the region for this trend to grow and be a concrete reality?

Around ten to fifteen years ago, investing in projects with high social and/or environmental measurable impact was something only NGOs and international organizations would do. Today, venture capital is entering the space because many of these kinds of projects are business oriented. They are meant to create profit while solving social and/or environmental problems.

Jane Hughes, from Global Innovative Finance, a member of the panel, shared the experience of the Social Impact Bonds (SIBs). As she explained, what started in the UK as a way of financing impact initiatives has been developing in the US market now for a few years.

Because they are not actually bonds, Hughes argues they are misnamed, “They are funds raised from private investors used to scale up the work of highly effective NGOs which are providing a social service relevant for the community.”

Governments repay the investors based on the success of the project.  This type of funding is based on the agreement of the indicators that will account for the success or failure of the project. Regarding regulations, as long as legalities are not in question, it does not need a special legal frame. The implementation of SIBs requires intermediate organizations to identify these high performance NGOs and walk with them during the scaling up process. Independent evaluators can also audit the results.

Patrick Watson, Director of Investment Advisory Services Group and Latin America Director of I-DEV International, had an interesting view of the of impact investments in Latin America. Based in Peru, his work is oriented to help global corporations, investors and SMEs in emerging markets do business together via profitable, high-impact partnerships, mainly in the Andean region.

Barriers for these type of investments in Latin America centered the discussion, as well as the key players and the challenges. The debate did not focus on which countries were leading this trend, although Colombia, Peru, Brazil and Argentina were mentioned, but in a general perspective of the region.

Both specialists stressed the need of fostering the ecosystem for entrepreneurship.  They pointed out that creation of an ecosystem needs the synergy and combined efforts of many players.  The main issues mentioned were the need of early stage finance and education for entrepreneurs. The major challenge is the lack of a unifying force that would coordinate efforts.  

According to Watson the market is fragmented, meaning that there is a lack of early stage financing. Even if some investing funds have been doing this kind of financing in order to create a market, the big pension funds are not likely to invest in these initiatives that are still very small and in early form.

Some experiences regarding the finance of early stages in Latin America mentioned by Watson and shared by the attending public were: community grouping, microfinance, and online platforms for financial inclusion. Even though these experiences are positive, they still don’t have the relevance needed to create a strong ecosystem.

Credit guarantees is a practice that has helped many entrepreneurs in other regions. Some funds have decided to offer banks the guarantee for entrepreneurs’ initiatives in a specific sector (for example technology innovation). In this way, entrepreneurs have fewer barriers to get loans from banks. These kinds of experiences could be replicated in Latin America.

Local incubators and entrepreneurs are also relevant for the creation of a market. But they are usually disconnected from the expectations of global investors and are not aware of all their financing options. This makes it hard for investors to find the potentially profitable impact initiatives. This fact could help strengthen the ecosystem but is itself a consequence of the weak entrepreneurial environment.

The second issue, the education of entrepreneurs, requires a great amount of time and money. Multilateral agencies are relevant players that could help with this aspect.  There are experiences in the region of international and multilateral organizations participating in the training of social entrepreneurs. But not all countries in Latin America are selected by these kinds of organizations as receptors of their support. Multilateral agencies tend to be driven by the geopolitical agendas of the countries they represent to select where and what kind of initiatives they will encourage.

Other key players mentioned as possible contributors to build up the ecosystem are Universities. To this point Hughes offered the example of how universities helped the development of SIBs in the US, highlighting that it could be a great asset in Latin America as well. It mitigates the educational risk and offers credibility to the system.

An interesting question was if the institutional instability of many governments in Latin America was also a barrier for impact investment. Would SIBs be viable in Latin America? Could governments in the region be trusted to keep the commitments needed for SIBs to work out? Hughes was optimistic. Even though there hasn’t been an experience of SIBs in Latin America yet she believes it could be feasible, taking into consideration that this model hasn’t been tried by national governments but with state and municipal ones. It also helps that the private investors involved in SIBs are always national ones.

In regards to Argentina, the panelists made a point that there is a lack of investment in general in the country. They mentioned that because of other strong variables there is a large opportunity for the ecosystem to be created. But because of macroeconomic reasons, it is seen as a risky country by investors.

At large across the industry, the fact is that impact investments haven´t proved to be more risky or less profitable than traditional investments. It is not a fact yet that socially driven investments will deliver the same dividends that the regular ones in the long term; so it comes to an issue of beliefs. The challenge is to break the pattern, the habits that the investment sector has had for many years in not considering sustainable financing as an option.  


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