Lessons in Building theImpact Investing

Ecosystem

INTRODUCTION

In October of 2012, The Rockefeller Foundation, Omidyar Network, Avina Americas and Fundación Avina partnered to help develop the impact investing ecosystem in Latin America. This led to the creation of the Latin America Impact Economy Innovation Fund (IEIF or The Fund), with the goal of:

Catalyzing collective action and regional market development that will accelerate these market-driven solutions for advancing social and charitable goals such as relieving poverty and promoting sustainable development.

The $800K grant fund, administered by Avina Americas, was launched to support efforts of pioneering actors already laying the bricks and mortar of the impact investing ecosystem in Latin America, a globally significant economy of considerable opportunity. Using the insight and experience of leaders in the region’s growing impact investing community as a foundation, the IEIF focused its contributions on four outcomes:

1) Catalyzing collective action platforms;2) Establishing market infrastructure;3) Supporting scaling of intermediaries;4) Contributing to fundamental research and advocacy.

Taking a lesson from nature, the inner machinations of impact investing have aptly been referred to as an “ecosystem”. Imbedded is the hope, the ambition that, as in the biological world, the complex web of impact investing will bring together all the key actors, all the necessary components to synergistically work together as a single functioning unit aimed at generating positive and tangible social and environmental impacts. The Global Impact Investing Network (GIIN) defines impact investing as “investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return”. With decades of market-based interventions behind it, impact investing has evolved from one-off opportunities to spawning an entire movement that brings together the spirit of innovative investors and the conscience of creative entrepreneurs. As societies and markets become more globalized, so too has the responsibility for human development become globalized. Transcending the confines that have limited the capacities of traditional development strategies, impact investing is blazing a trail through the universal principles of business and social change. It is a space now occupied by visionaries who believe that economic progress should not have to come with a societal or environmental price tag. It is these visionaries of investors, entrepreneurs, organizations, foundations, and governments who are coming together to build this ecosystem from the ground up and enacting a response commensurate with today’s societal issues and environmental challenges.

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Through this paper the IEIF partners aim to generate further discussion about the future of impact investing in Latin America and provide fodder for dialogue through which solutions and new ideas might evolve. This body of work is not technical in nature, but more pragmatically designed for a broad audience ranging from investors, intermediary organizations, and service providers, to companies, entrepreneurs and government. This document was developed primarily through interviews, the IEIF grantee reports, and literature sources. It provides the cumulative subjective views of the contributors based on their individual experiences and observations within the geographic confines of their work.

Avina Americas is a US public charity organization created in 2008 to impact sustainable development in Latin America and beyond by engaging US actors in shared strategies for action which contribute to the common good. Avina Americas engages partners, knowledge and resources to achieve greater impact; we serve as an institution of reference and a fiscal steward for social investors and philanthropic and private organizations interested in contributing to sustainable development in Latin America and beyond. Avina Americas works closely with Fundación Avina, a private foundation with local presence and more than 20 years of experience operating in 21 countries throughout Latin America, to consolidate and scale shared strategies for systemic change throughout the region. www.avinaamericas.org

PURPOSE OF THIS PAPER

ABOUT AVINA AMERICAS

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“Despite the compelling win-win of generating both a financial and societal return, the addition of an impact lens to investment propositions has increased the sense of risk for many asset owners, deterring or even prohibiting them from entering the market. One way to reduce this sense of risk (and to scale the market) is to wait for the industry to prove itself. We do not have time…the societal challenges that impact investing can address are too urgent to wait this long.”

— Clara Barby and Joanne Gan, Shifting the Lens, A De-Risking Toolkit for Impact Investing

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THE BENEFICIARIES OF THE IEIF WERE:

ARTEMISIA To provide institutional support to the program, “Aceleradora de Impacto,” a program that identifies experienced entrepreneurs intent on creating social impact, selects the most high-potential early stage social businesses, and accelerates them through a six-month intensive program focused on business model design, management team capacity building, and connection with national and international investors.

COMPARTAMOS CON COLOMBIA

To strengthen and consolidate the Pioneros Open Competition model, a sector-focused methodology with three primary objectives: 1) Identify innovations and models focused on specific sectors or development challenges, emphasizing early-stage models with growth and scale potential; 2) Increase the knowledge available on the challenges and opportunities for impact investing in these sectors; 3) Promote communities of practice around sectors or development challenges, in order to strengthen the industry infrastructure that is critical for growth and poverty alleviation in Latin America. With the grant, Compartamos con Colombia executed the Pioneros Open Competitions over a period of 12 months and identified companies that would receive funding and support for early stage development. More broadly, IEIF’s support helped strengthen a public-private cooperation mechanism that has proven effective in unlocking critical barriers for impact investing, and, if successful, has the potential for replication throughout Latin America.

ICE

To address the relatively low level of awareness and readiness of the key actors in Brazil to grow the impact investing space. In the first phase they updated and expanded research to extensively map the impact investment and social business ecosystem in Brazil. In the second phase, they properly equipped business schools to generate social impact case studies and educational materials. These materials in turn were incorporated into their curricula, as well as for outreach efforts to the media and the general public to share the conclusions of this research and to make the case for impact investing and social business.

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NESsT

To document and disseminate best practices in government policy as well as opportunities for new government policies that create market demand for impact enterprise in Brazil, Chile and Mexico. The project provided the following: In-depth research on existing government policies; Focus group meetings with government, academic and impact enterprise leaders to test these policy ideas and to identify new ones; Development of a "how to" manual of case studies and best practices; A series of seminars with these leaders to share examples, identify opportunities, and create an ongoing network to enhance government's role in the development of impact enterprises.

NEW VENTURES MEXICO (NVM)

To launch a national call in Mexico for innovative companies in early stage growth that address environmental and/or social issues through their business models, with an option to receive investment in order to catalyze their growth. With this grant NVM’s goal was to disseminate and catalyze impact entrepreneurship and to develop and strengthen the impact investing ecosystem in general, and by extension, its contribution to resolving environmental and social challenges.

VILLAGE CAPITAL AND TONIIC

To pursue substantial research on the legal and regulatory requirements that govern early stage, impact-oriented businesses, and to coordinate local and international expertise and resources to streamline the process for early stage foreign impact investors. Deliverables from such research included a step-by-step framework for entry positioning for new foreign impact investors, a collection of resources available for collective use (legal advice, due diligence assistance, local representation and registration assistance), and open source bilingual term sheets and investment documents.

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Backed by an estimated $1.4 billion in investment commitments , the impact investing industry in Latin America continues to grow and expand, poised to provide economic solutions for the 164 million people (28.2% of the population) who remain marginalized and in poverty Over the last decade, and despite the economic downturn of 2008, investors have gravitated towards the impact opportunities presented by Latin America’s dichotomy of a burgeoning economy, and yet disproportionately impoverished population. At the same time, conversations taking place within the development arena have been

shifting from the issue of poverty to the more fundamental problem of inequality. Beyond employment and income-generation, potential poverty-reduction strategies include

enabling parity in access to goods and services that improve standards of living, as well as increased ownership of assets.

Recent history has seen an alignment of multi-agenda actors aimed at the singular mission of building the infrastructure necessary to generate

and support businesses that want to “do good” in addition to making a profit. In this regard, emerging markets

have taken center stage, and private equity and venture capital funds have formed for the

express purpose of making impact investments. A cadre of service providers, mainly accelerators, incubators and a host of intermediaries have emerged to catalyze the establishment of social enterprises on

the receiving end of impact capital. Even traditional philanthropic organizations are

co-creating hybrid impact investing models, filling in critical resource gaps while the industry

learns and develops from experience. To date, impact investing has successfully been launched in

Latin America and continues to transform the development and business sectors while providing an

expanded range of investment options for new and long-standing investors. Moreover, the unique addition of

academia into the impact investing ecosystem in Latin America is creating a new dimension of opportunities for

innovation in the sector.

1 Kusi Hornberger, SIBM.co personal communication June 11, 2014 estimatedbased on JP Morgan Impact Investor Survey 2013 and GIIN data.

2 Economic Commission for Latin America and the Caribbean (ECLAC).2013. SocialPanorama of Latin America. United Nations Publications. Santiago, Chile.

$1.4billion

investment comm

itments

IMPACT INVESTING IN LATIN AMERICA

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KEY LESSONS LEARNED FROM THE IEIF

FOSTERING INTER-DISCIPLINARY SYNERGIES: There is awareness within the impact investing community in Latin America that establishing a functional ecosystem requires the cooperation of stakeholders across multiple sectors and disciplines. For example, at the regional level, the Foro Latinoamericano de Inversión de Impacto (the Latin American Impact Investing Forum or FLII), organized by New Ventures Mexico is an annual event designed to galvanize such support and cooperation. National and local level efforts, however, are less directed. As one grantee states, “coming together has been more organic than strategic.”

The impetus provided by investors, funders and local champions as well as a growing interest in social entrepreneurship is creating a platform for actors to find commonalities among their traditionally differentiated interests, working on the increasing realization that their cumulative actions will produce a greater result than what they can achieve on their own. The program implemented by ICE offers another example supporting this concept, as they brought together Sao Paulo’s three main universities (FGV, FEA and Insper), generating thought-provoking synergies among them. The group has since grown to six partners and other universities now seek to become members. In addition, the University of St. Gallen (Switzerland) has offered the group the opportunity to be part of their own Impact Investing Latin America network, fostering additional inter-disciplinary synergies. For ICE, some of the benefits of working with academia included:

Generation of knowledge, which gave more legitimacy to the work.

Working directly with professors and not just students. Professors are oftenleft out of the process although they can add value by validating knowledgeand through other exchanges.

Working with top business schools gave ICE the credibility to disseminateknowledge gained to other professors and to the broader Brazilianeducational system.

ICE-funded case studies on social finance and impact business inspiredstudents to explore practical questions about situations they willface in this sector.

There is growing recognition that multi-disciplinary actors, many of whom have never crossed paths before, must work together synergistically to give the impact investing ecosystem backbone and structure at the level at which successful deals are made.

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CRITICAL FOCUS ON COMPANY SELECTION: As accelerator models continue to develop in the region, it is becoming increasingly clear that an outstanding key to success is assessing the quality of companies upon entrance into the accelerator program. This was surprisingly more indicative of success than the quality of companies when they exit the program. Successful ventures have resulted primarily when existing business experience is applied to social sectors and not the other way around. However, because the added value of a social enterprise is its projected impacts, parameters for assessing business acumen are often overshadowed by the promise of social and/or environmental benefits. For an accelerator program, it has become clear that company selection is the first level at which risk is mitigated. A more rigorous company selection process using criteria that evaluate the core business model, leadership, management and accountability of the business, in addition to the overall impact potential of the venture, is necessary to ensure performance expectations are met and the probability of success is increased.

In the case of Compartamos con Colombia, the Pioneros program focused on identifying extraordinary leaders and entrepreneurs that were able to implement innovative initiatives to change realities. Specifically, Pioneros worked with entrepreneurs who were in the validation and preparation stages, where a more in-depth analysis of the business model is needed in order to identify the best approach to consolidation and scale. For this identification, Pioneros launched several open challenges during 2013 that attracted hundreds of entrepreneurs. The first challenge the organization faced was attracting entrepreneurs that were in the pre-specified stages of development as required by Pioneros. Most of the proposals received were from entrepreneurs with ideas that had not been developed and had a long way to go before even starting to validate their value proposal with clients. The main take-away from this process was the need to highlight where Pioneros can add the greatest value, and communicating this properly in the open challenges in order to attract the entrepreneurs in the stages for which they were aiming. This was especially important due to certain limitations Pioneros had for its investments. Since Pioneros’ capital is both private and public, they have less flexibility with the investments they make, and therefore have to be very careful to avoid underestimating the stage of the project and whether the services and resources they can provide will add value to the organization and help it grow to a point of scale.

DEVELOPING SECTORAL ECOSYSTEMS: With capital investments diversified among various sectors including health, agriculture, microfinance and energy, building the impact investing ecosystem in Latin America is not a singular endeavor but is, in fact, the building of multiple ecosystems across the economic landscape. Focusing on areas of common ground among actors keeps the conversation at a general level and makes the delivery of impact difficult. Successful investment deals are transacted under conditions specific to each economic sector, thus requiring specialization adapted to the uniqueness of those industries. For intermediaries working to develop a competent pipeline of potential investees, the support services and technical assistance they provide must not only be tailored to the social enterprise but also to the economic sector they are intending to participate in, necessitating the building of their own capacities in addition to that of potential investees.

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“Entrepreneurs, not projects, should be evaluated as they are the most

important part of the venture.”

— Compartamos con Colombia report to the IEIF

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Similarly, developing a political agenda to foment impact investing is a multi-faceted and multi-tiered effort requiring expertise appropriate to the highly nuanced regulatory and political mandates governing respective sectors. The recent engagement of academia in impact investing, notably in Brazil and Mexico, is adding new dimensions to the conversation particularly with regard to the themes of definition, systematization and impact measurement. In this regard, the impact investing community itself has a steep learning curve in order to speak in more specific sectoral dialects, beyond the universal language of impact investing.

Compartamos con Colombia launched four open challenges in 2013, all with different foci and some without a specific sectoral approach. They quickly learned this was not a best practice as they were not able to become experts in any one sector, and therefore it became very difficult to add value to such a wide range of initiatives. Consequently, in 2014 the Pioneros initiative limited their scope of work to only two sectors—housing and education. Furthermore, they determined that their work would not only be on consolidating and scaling models and solutions for those sectors, but also on complementing them with robust knowledge and communities of practice, to truly have an impact on each sector at the public policy level.

Artemisia has been using a sectoral approach since 2012, focusing on areas of structural social impact in the lives of low-income people: education, health, housing, and financial services. For each sector, Artemisia defines theories of change. These theories allow the Artemisia team to identify the most relevant businesses within the Brazilian context, which will accelerate the development of a society with equal opportunities for all. In particular, Artemisia developed strong theses for education and health, and as a result, more companies in their pipeline come from these sectors. Today, within the accelerator, 75% of their companies are education-related, and the number of heathcare-related companies has doubled since its inception. Artemisia has also used their findings to raise awareness about certain sectoral challenges to stimulate a new generation of businesses that can address them.

NESsT notes that policies and regulations affect sectoral investments both directly and indirectly. A certain policy or regulation can provide incentives to foster social impact in a specific sector, such as early childhood, youth unemployment, or low-income housing. Successful policies and regulations applicable to certain sectors might also serve as models that can be adapted to other sectors. Keeping this sector-based approach in mind, NESsT is developing an article for the Impact Investing Policy Collaborative (IIPC) that focuses on early childhood development in Brazil, and how impact investing and impact enterprise can help strengthen this sector. Critical to this case is a national plan that was developed by public and private stakeholders that also points to ways the sector can be developed, as well as certain existing policies and programs (Creche para Tudos, ProInfancia) that can be further leveraged through impact investment and made sustainable through impact enterprise. These policies can help fill the financing and service delivery gaps that currently exist in trying to build childcare centers for all children under the age of five in Brazil, of which there are millions.

FOUR OPEN CHALLENGES IN 2013

THE VALUE OF PARTNERSHIPS AND PEER-TO-PEER LEARNING: Effective and efficient venues for knowledge transfer and sharing experiences are critical to creating a functional ecosystem that can respond to a rapidly growing market. Beyond peer-based networking, investors, enterprises, accelerators and incubators are finding structured peer-to-peer interactions more effective for learning. The small but growing cadre of impact investing practitioners in the region is fast becoming a key resource for mitigating problems and risks. It is addressing critical issues and replicating successful strategies by virtue of their experiences in Latin America. Peer-to-peer learning is also creating a sense of camaraderie among various actors, including investors, who aim to work more cohesively toward building the impact investing ecosystem whether nationally or regionally.

Village Capital’s model heavily depends on developing and leveraging peer relationships. They apply a “problem-based approach,” in which they focus on a specific problem (versus a general problem) in order to attract the best partners, stakeholders, and investors. For instance, partnering with Toniic through the IEIF allowed them to focus on cultivating local networks of angel investors. Given that the transaction costs for international investors with small investments in Brazil are very high, it was critical for Village Capital to access a strong network of local angel investors to give the support needed to early-stage enterprises, both of which Toniic facilitated. Village Capital plans to continue partnering with Toniic to further this objective and to support their activities.

“High level politicians will come on board only if they are convinced

that social enterprise solvesa problem that they have. They willnot be motivated by the concept of

social enterprise inand of itself.”

— Nicole Etchart, NESsT

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CROSS-CUTTING IMPACT INVESTINGCHALLENGES IN LATIN AMERICA

EARLY-STAGE INVESTMENTS: J.P. Morgan’s 2014 impact investor survey report lists the top challenge to the growth of the impact investing industry as the “shortage of high quality investment opportunities with a track record”. Those working on generating such opportunities in Latin America would agree, but this also points to the deeper issue of the dearth of investors willing to partner with early stage companies. Of the $1.4 billion in impact investment commitments, only $800 million is currently invested, a vast majority of it in growth-stage businesses. The current pipeline of potential investees is too nascent for investors to assume the risk of making a deal. Moreover, they are not willing to invest in developing the capacity of these new entrepreneurs whose drive for social change needs to be matched with business acumen. This gap, thus far, has been filled by philanthropic funds that support learning networks, accelerators and incubators. Yet in business, there is no substitute for a track record of experience that, often, takes many years to build. Early stage investments combined with technical support and possible de-risking mechanisms may alleviate some of the major challenges associated with investing in early stage development.

One of the biggest challenges for Compartamos con Colombia was understanding the limitations of their capital. Pioneros has both public and private funds, and it is in their mission to understand how these two worlds can work together on social innovation projects in order to achieve the greatest impact.

Both of these actors have distinct interests, requirements and reach, so it was essential for Compartamos to understand their expectations and limitations in order to define what Pioneros could support. Early stage investments have great risk, as there are often times still many hypotheses to be validated and not always a clear understating of the business model. This risk can be assumed partially with private capital, yet public capital is much less flexible. It is therefore important to understand how to manage the different sources of capital in order to fulfill the projects’ financial needs at each stage in the development process, as well as maintain the limits of the capital.

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Despite a rapid increase in committed capital and investment vehicles for impact investing in Brazil, there is still a chronic shortage of funding to meet the needs of early-stage business, due to a combination of risk aversion and transaction costs. Artemisia, for instance, works with early-stage companies whose capital needs range from USD $50K-300K. There are very few players who are interested in investing at this stage as it carries great risk. For these reasons, Artemisia will set-up a seed-investment vehicle to support small and growing businesses (SGBs) that use technology to improve the quality of life of the population at the base of the pyramid. With ten years of experience selecting talented entrepreneurs with high-potential impact business startups, Artemisia is in a unique position in the Brazilian market both to understand the needs of these startups and to identify the most interesting investment opportunities. Furthermore, their established relationships with investors – both impact-focused and mainstream - will ensure that these investments create significant impact downstream, and their pioneering work at the heart of the ANDE Brazil Chapter will enable them to share their learning as widely as possible. Through this project, Artemisia will be addressing one of the most critical bottlenecks in the Brazilian impact investing space, unlocking the potential for a growing number of entrepreneurs to create scalable impact businesses that deliver financial returns, impact the lives of thousands of people at the base of the pyramid, and inspire others to do the same.

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“Lack of early stage investment means businesses fall to the wayside before having the chance to prove themselves.”

— Robert Parkinson, Artemisia

THE BURDEN OF PROOF: As with impact investing in the rest of the world, the main challenge that besets the sector in Latin America is demonstrating tangible, sustainable social and/or environmental impacts and profitable returns on investments. Barring conceptual, methodological and other issues related to measuring impact, the definition of what success looks like remains nebulous. With underdeveloped traditional exit strategies such as IPOs and acquisitions, a successful exit in Latin American terms may take on a different form, yet to be developed. Monitoring methods have yet to produce conclusive indicators for success that can be systematized and integrated into impact investing business models. For intermediaries working on education-based strategies to help build impact investing infrastructure, methods for measuring successes in academia are wanting and anecdotal. The same is true for intermediaries working to develop a policy agenda based on a handful of cases instead of a wide range of replicable models. As long as successful ventures remain in short supply, industry leaders and governments in the region, both critical to scaling and mainstreaming impact investing, view these successes as isolated incidents and not representative of the sector’s potential. Moreover, the dearth of successful investments reinforces the mutual exclusivity between social and financial investments, maintaining social contributions within the philanthropic realm through corporate social responsibility or foundation initiatives. The challenge lies in finding the balance between claiming success too early only to have investors lose faith and erring on the side of caution by claiming success too late for investors and other supporters who then lose interest.

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LAGGARD INFRASTRUCTURE AND SCALABLE GROWTH: The pace at which impact investing infrastructure is being developed lags behind the level of interest and committed investments in the region. Despite incremental progress, prohibitive transaction costs, an inadequate regulatory environment and meager political will remain critical barriers to a fully-fledged impact investing economy. Experiences in the US and Europe have demonstrated the catalytic effect of regulations and policies in creating a tipping point that launched impact investing into mainstream business despite persistent uncertainties. Apart from economic incentives to motivate investor and business participation, enabling regulations and policies creates a credible and stable environment that reduces real and perceived risks to more acceptable levels. The main challenge in Latin America is that conducting business in general and especially where foreign investment is involved is inherently complex and cumbersome. Issues related to transaction costs, financial services, legal provisions, and due diligence among other aspects, are not specific to impact investing but intrinsic to doing business in any country. Therefore, any adaptive changes to accommodate for impact investing requires systemic changes that are difficult to negotiate and slow to take shape. The unfortunate reality is that to a great extent, impact investing has to evolve based on market forces that may not always operate at a speed commensurate with the urgent needs of impoverished communities or the environment.

Village Capital, as hypothesized upon embarking on this project, found that there were significant barriers to investing small amounts of capital efficiently in Brazil. Their research confirmed that the capital costs of maintaining local entities with sufficient legal representation and record keeping capacities become prohibitive for their investment commitment of $25,000. To address this, Village Capital explored filing for a parent entity in the US that could more efficiently channel international impact investment dollars into a test preparation company focused on the base of the pyramid. Based on this structure, they were able to attract another significant US investor who committed $250,000+ in co-investment alongside Village Capital’s $25,000 commitment.

NESsT attempts to address this broader infrastructure challenge in their book, Positioning Social Enterprises in the Policy Agenda: Road to Travel, which examines the critical role of policy and an enabling environment to encourage and facilitate social enterprise. The book recognizes that in many emerging market countries, the topic or sector is not yet positioned at all, and must first apply a framework which:

The book features several examples demonstrating how this could be done at various levels – by sector, national or local, either through the impact investing or impact enterprise side.

Identifies the key social needs to be addressed in the country at both a national and local level;

Identifies the key needs of the impact investing and impact enterprise sectors and how to support both;

Identifies existing policies that can respond to those needs and create ways to adapt them to local situations;

Identifies the key stakeholders and policy entrepreneurs that need to be cultivated and brought together to work on the area of need and related policy;

Aligns all of the above with the goal of positioning a specific policy agenda.

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ENGAGING CORPORATES: In Latin America, small and growing businesses (SGBs) are the foundation of the impact investing community. With small to medium sized enterprises constituting an estimated 99% of businesses and accounting for approximately 67% of employment in the region , they are undoubtedly an important cornerstone of economic growth where investment opportunities are in greater supply.

SGBs contribute very little to GDP and the significant productivity gap between small/medium businesses and large businesses – large companies in the region have up to 33% greater productivity than microenterprises – suggests that larger companies also need to become involved if economies of scale for social and environmental impacts are to be achieved. Impact investing in Latin America is focused on small deals that are not easily scalable or replicable in large part because smaller businesses are very heterogeneous and their processes highly differentiated. Larger businesses with a typically longer track record of formalized practice as well as internal capacity for growth and expansion (in terms of size, geography, productive output etc.) offer a greater potential for scale. However, mainstream business has been slow to board the impact investing train in the region and some experts point, in part, to the industry’s core objective having gotten lost in translation. While the impact investing community has successfully made the case for business-generated social and environmental benefits, it has been less successful in making the business case to demonstrate why it makes sense for existing companies. Cost savings from localizing key aspects of their value chain or increased productivity resulting from small investments made in the technical capacity of local suppliers, for example, are compelling business arguments apart from the income and employment impacts of including low-income suppliers into the company value chain. Moreover, large local companies are less likely to be incentivized by the promise of foreign investments and the idea of foreign-held equity in their companies. Impact investments for these companies would need to take on a different form, likely along the lines of packages and innovative financing to resource based impact business models. In this regard, the impact investing community must do better at both promoting the idea of businesses “doing good” but also in demonstrating that doing good is, in fact, good for business.

“Social entrepreneurs who are trying to do business have failed more often than not. We have many entrepreneurs with more heart

than skills, but in this sector you need skills. ”— Rodrigo Villar, New Ventures Mexico

3 OECD/ECLAC. 2013. Latin America Economic Outlook 2013. OECD Publishing, Paris, France

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In the case of Compartamos con Colombia, engaging with big business has been one of their key strategies. Not only do corporates have great knowledge and experience, they also have well-structured sustainability models that allow them to identify social impact as one of their core activities. Compartamos works with companies that truly believe social innovation is key for the country’s development. Their main strategy for engagement is to present high impact projects that will greatly leverage their investment. Since Compartamos has been able to network with international cooperation entities and foundations, the investment that large companies make in different projects is matched or they receive counterpart funding that is three or four times the amount invested. This is an excellent value proposition for large companies, as they will achieve desired social results and also have an impact on a much larger scale than they would on their own. It also allows for identifying potential new inclusive business opportunities. For example, Pioneros conducted a thorough study and in-field research on the collaborative economy as applied to urbanism, productivity and housing, which resulted in a series of initiatives that will soon be piloted with major constructing companies whose main market is low-income housing. Through their engagement with Pioneros, the companies were able to identify initiatives to improve their practices and generate better results.

NESsT works with big business regularly, helping them to engage in social enterprise. In some cases, NESsT works with companies like Citigroup, Petrobras, Petrom, and Fundacion Minera Escondida to help them support enterprises in their communities. Interestingly, NESsT is starting to see a great deal of interest from companies go even further and actually include social enterprises as part of their supply or value chain. This can be as simple as purchasing a product or service from an impact enterprise, to actually partnering with the enterprise to become a key supplier. Several of NESsT’s portfolio members are suppliers to companies (e.g., Incores, Corpam, Nueva Gestion etc). In other cases, NESsT approaches the large company and works with them to identify enterprises that can support the company’s supply or value chain.

Working with corporates, however, can be quite challenging as they often expect and demand high quality and volume, around-the-clock availability, and expedient delivery. NESsT believes it is often better to start small, with one project or product for instance, before expanding too broadly. Once the company makes this initial commitment and the impact enterprise successfully delivers, it is more likely the partnership will grow. The benefits of working with large companies can be significant, however. In some cases, employee engagement opportunities can allow impact enterprises to leverage pro bono support. Additionally, large companies offer a great deal of marketing and visibility opportunities. However, one has to do proper due diligence to assess which companies are serious about social impact, and which ones are simply paying it lip service. Moreover, it is critical to make sure that potential partner companies are not in violation of any legal requirements.

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SUSTAINABLE SUPPORT MECHANISMS: Intermediaries working in Latin America are critical to developing the impact

investing market by creating and cultivating connections that form the ecosystem infrastructure and shape the practice of impact investing

in the region. Many of these intermediaries are non-profit organizations financed mostly through government grants and private philanthropic funds

that are dwindling with greater competition and other causes or priorities vying for donor interest. Increasingly, this significant group of impact investing actors is facing financial insecurity at a critical juncture of ecosystem development when demands for their services are both growing and expanding.

Toniic, for example, is a key intermediary working to develop both the entrepreneurial and investor side of the equation globally. They recognize and benefit from the growing interest in impact investing in Latin America, as well as the significant increase in deal flow from the region. Toniic facilitates relationships with a number of individuals, families, and small institutions around the world, many of which are looking to grow their impact practice in Latin America. They see a huge opportunity to connect their members with Latin American entrepreneurs through their impact investment platform, and even plan to open a Toniic office in the region at some point. Organizations like Toniic require funders to support their vision to help stimulate the impact investment market in these regions where the ecosystem is still underdeveloped.

“Deals are made, not found. One would be hard-pressed to find deals that would not require high touch interventions focused on adapting the

business model for scalable impact and commercial viability.”— Robert de Jongh, Deloitte

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THE GROWING MIDDLE CLASS: Between 2003 and 2009, Latin America and the Caribbean’s middle class grew by 50%, from 103 million to 152 million while poverty levels fell from 44% to 30%, and for the first time the middle class population equaled that of the low-income segment . The opportunities for impact investing in this scenario are twofold: first, this new middle class is increasing market demand for products and services in the sectors in which impact investing is active; and second, this new middle class remains vulnerable to sliding back into poverty and requires stable economic opportunities that impact investments can help provide. This emergent class also harbors an educated and market-competitive workforce. Owing this upward mobility to overall growth in the economy and job creation, continued economic growth and security in the region makes it attractive to investors in addition to a little-fluctuating growth rate over the last five years.

EMERGENCE OF NEW INNOVATIONS: In response to the challenges of scale, pockets of innovation are emerging in the impact investing industry as different actors test a diverse range of mechanisms to broaden and deepen the potential impact of these investments. Three main innovations are described here:

Inclusive Business: Over the last five years, as a corollary strategy to SME development, the government of Ecuador has been creating an incentivized system for supporting the development of inclusive businesses – the direct, formalized integration of low-income producers, service providers and consumers into medium and large local company value chains. As a homegrown initiative with little foreign involvement, both businesses and low-income segments are able to avail of domestic financial and technical assistance that enable the economic participation of historically marginalized communities and the development of integrated business models for companies.

PROMISING OPPORTUNITIES FOR IMPACT INVESTING IN LATIN AMERICA

4 Ferreira et.al. 2013. Economic Mobility and the Rise of the Latin American Middle Class. IBRD, The World Bank. Washington, DC.

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“Hubs of activity are beginning to form in Latin America. There is more of an ecosystem developing where different players involved in different parts of the venture life cycle are coming together.”— Kusi Hornberger, SIBM.co

De-risking: As the pressure mounts on investors to invest in early stage, largely unproven social enterprises, the industry is exploring a suite of de-risking options that mitigate risks to acceptable levels. Downside protection, product bundling, performance-based technical assistance, and evidence-based investments are some of the features being explored as de-risking strategies.

Social Impact Bonds (SIBs): Also called the “pay for success” investment model, social impact bonds have been pioneered in the US, United Kingdom, and Australia to address issues where measurable data is readily available such as recidivism and education. The IDB’s Multilateral Investment Fund (MIF) recently announced a $5.3 million fund that will test the social impact bond model in Latin America. An estimated $2.3 million will be used to develop SIB infrastructure in the region and the remaining $3 million will be invested in projects that address key social problems. With growing experience in the region, impact investing is evolving into new and unconventional forms tailored to unique social and market conditions.

EXPANDED COLLECTIVE: Impact investing actors working on multiple levels are cooperating in a more organized way through network activities and other venues for learning, sharing lessons learned and disseminating best practices as they evolve. In the absence of singular leadership that is pushing the impact investing agenda forward in the region, the ecosystem is being built by a cohort of practitioners that is becoming increasingly attuned to one another’s work and is finding more ways to coordinate and cooperate. In many cases, philanthropic resources that support cross-sectoral efforts are connecting otherwise independent initiatives that are beginning to cognitively coalesce around ecosystem development. Although innovations and experiences may be country-specific, the field of impact investing actors is recognizing the value of learning from each other’s mistakes and successes. Moreover, a new type of entrepreneur is emerging out of Latin America that is more socially and environmentally aware and concerned. These new entrepreneurs are determined to build businesses in which social and environmental benefits are fully mainstreamed into their business model. As more resources are placed in the impact investing economy, not only through investors, but through governments and multi-lateral support such as the Inter-American Development Bank’s Multilateral Investment Fund (MIF), the industry continues to grow and quickly adapt to the challenges and opportunities that are emerging from the region.

“We want to invest in companies whose impact is so inextricably linked to their business model that they can’t separate operational success from impact results.”— Victoria Fram, Village Capital

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ALLIES IN ACADEMIA: As the most recent entrant into the impact investing arena, universities are fast becoming

key actors in the ecosystem by formalizing business models founded on social and environmental returns. There

is a nascent but strong interest from business schools, particularly in Brazil and Mexico, to integrate impact

investing principles and models as a part of their business management curriculum. In Brazil,

thanks in part to social media and mainstream media outlets, there is an

emerging cultural shift among the youth that considers social

enterprises fashionable. Passing trend or not, its effects are showing up in

classrooms consistently filled with students who have a keen interest in social entrepreneurship. These pioneering universities are shaping a new generation of business owners who are concerned about long-term sustainability and want to do good as part of their own future business practice. In addition, universities have the potential to fill critical gaps in the impact investing arena in the areas of research and documentation of practitioner experiences, and also in the field of measuring impacts, that is still sorely lacking. In this regard, academia could create a niche for itself as a neutral and unbiased repository of data, information, best practices and impact measurement methodologies that are critical to the ecosystem. As Celia Cruz, Director of Instituto de Cidadania Empresarial (ICE) in Brazil states, “How many aspects of the ecosystem can reside in academia? Universities can fulfill critical gaps in information and our understanding which can be used for guiding and informing impact investing funds.”

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“One must pay attention to not just poverty but inequality. Poverty cannot be solved effectively if not eliminating inequality through the transition of asset

ownership.”— Morgan Simon, Pi Investments

“The question that remains is whether impact investing will live up to expectations and meaningfully resolve persistent societal and environmental challenges in Latin America and succeed where traditional development strategies have fallen short.”

– Morgan Simon, Pi Investments

INCREMENTAL PROGRESS IS STILL PROGRESS: Although increasing public-private support varies country by country, the existing socio-economic and political structure in Latin America provides a foundational system through which impact investing can be integrated. Building off of the region’s developed microfinance sector and generalized SME support, there are systems in place from which the impact investing community can readily draw. While some may lament the lack of speed and urgency with which the impact investing ecosystem is developing, there is agreement that progress is in the right direction and is rapidly moving out of the “proof of concept” stage and into the more substantive market capture stage. In addition, countries like Mexico, Colombia, and Brazil, where structural policy and regulatory changes continue to facilitate impact investing deal flow, serve as working examples for other countries that no longer have to reinvent the wheel. Intermediaries are systematizing processes, generating working models and disseminating experiential knowledge that investor and entrepreneurial counterparts in the region can learn from to prevent recurring mistakes and mitigate inherent risks. With the level of capital available to Latin America, a growing number of local investors, governments and local companies are paying greater attention to social and environmental impact business models and are beginning to actively seek ways to participate.

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CONCLUSIONS: THE PATH FORWARD

According to some industry experts, in terms of Monitor’s (2009) evolution stages, impact investing in Latin America is transitioning out of the uncoordinated innovation stage and entering the phase of marketplace development as it reaches a new level of maturity and innovation. It is transcending the conceptual proving grounds. Relative to other developing regions in the world, Latin America’s impact investing ecosystem is being established rapidly despite the fact that certain aspects of the value chain are slow to gain traction. However, the challenges in the region, though nuanced by country-specific conditions, are not unique but rather a normal and expected part of the market’s development process. While much can be learned from more advanced markets, it is also acknowledged that impact investing is largely experiential. There is no correct way of doing it and there is no silver bullet or short cut to success. What is vital at this particular juncture of the ecosystem’s evolution is to find a balance of approaches that optimizes finite “learning curve” resources, maintains forward momentum of the industry’s development and demonstrates tangible results.

The following areas of innovation, recommended based on specific underlying principles, could contribute to that forward momentum while simultaneously addressing some of the more salient challenges that remain in the region.

UNDERLYING PRINCIPLES OF RECOMMENDATIONS:

Long-term mentorship and incubation are necessary to sustain successful impact enterprises before and after investment. There is still a need to strengthen the demand, by continuously educating and engaging key advocates and influential stakeholders.

Local ownership of impact investing lowers investment risk and also will ensure sustainability beyond foreign capital.

The impact investing industry cannot achieve meaningful scale without government. There is a clear need for policy and regulatory initiatives and efforts for enabling business and private sector development in general.

Collective actions create a scale of efficiency that hastens impact investing ecosystem development. Tie social impact to financial performance via partnerships between researchers, fund managers and companies.

Demonstrable impact through evidence-based measures are imperative to further the impact investment market. Develop best practices guidelines for investors, investees, and instrument utilization. Focus on specific sectors. Facilitate adoption by segment companies based on relative stages of development and mapping assessment standards based on each life cycle stage.

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ACCELERATION 2.0: Accelerators remain the key actors in generating a pipeline of investment ready enterprises. The greatest challenge the next iteration of accelerators must address is ensuring

success and sustainability after the deal is made. For this, accelerators require long-term resources to fulfill an even longer-term mentoring function in order for impact enterprises to

establish coordinated strategies with incubators to deliver sustained, hands-on support to nascent businesses. Beyond the applied training currently used to build business capacity,

mentoring will provide guidance to enterprises, particularly at critical decision-making or operational junctures, enabling them to address any issues and challenges that arise in real time over the course of their establishment and growth. Moreover, longer-term funding will allow accelerators to specialize their service lines in adapting to investments that are increasingly becoming diversified across heterogeneous economic sectors.

LOCALIZING IMPACT INVESTMENT: Inclusive business experiences in Ecuador, Bolivia, and Peru are beginning to demonstrate that local commercial businesses are critical to the long-term sustainability of impact investments, achieving impacts of scale and integrating social benefits and environmental sustainability into mainstream business models. As the mainstay of national economies, local enterprises can confer a level of sustainability and longevity that foreign investment cannot. Whereas foreign capital is subject to changing investor interests and priorities, local businesses – particularly where government support is present and a working business model is in place – have a vested interest in sustaining their own impact investments. Capitalizing on successful local ventures, resources could be placed in a well-structured pilot initiative designed to engage larger local companies and crowd in local investments. Such a pilot would also catalyze learning through the exploration of emerging mechanisms such as de-risking tools, local financial systems, technical assistance facilities, as well as policies for local impact investments. The multidimensional nature of such an initiative provides the locus for cross-sectoral cooperation as well as public-private partnerships while proactively building a critical portion of the ecosystem that is currently underdeveloped.

POLICY DEVELOPMENT TIPPING POINT: By far, cultivating government support for impact investing is one of the greater challenges in the region. The

main issue associated with any kind of policy change is the time and persistence required to cultivate relationships, which equates to the need for long-duration

funding that is difficult to find. However, countries such as Colombia where the government has a demonstrated willingness to partner with institutions in an effort

to develop the impact investing arena present a unique opportunity for creating a policy tipping point. A consistent and sustained level of engagement can capitalize

on existing public and private sector partnerships as well as impact investing successes for developing “quick win policies” that, over time, can be leveraged towards broader,

more comprehensive policies and regulations to underpin impact investments. Long-term policy funding that enables a sustained effort can help mitigate characteristic issues of

administration changes, changing government mandates and the often-extended timeframe for new policies and regulations to get through government bureaucracy.

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DEMYSTIFYING IMPACT: As more impact enterprises come on line, there is mounting pressure to move beyond anecdotal information and generic indicators and transition to evidence-based data that demonstrate tangible social and environmental returns on investment in conjunction with standard business performance measures. Despite social and environmental benefits forming the very core of an impact enterprise, resources, methodologies and efforts directed at obtaining impact data are insufficient. Moreover, many – if not most – successful deals are not designed with an integrated system of measurement. To make progress in this critical aspect, dedicated resources are required to address important questions that establish positive impacts to direct investments. Earmarking resources can prevent impact measures from becoming an afterthought in impact business development while providing room for innovation in developing and testing appropriate frameworks and methods. Creative approaches that better accommodate the complexities of impact enterprises can be explored including tools and methods that are more effective at long-term tracking than intermittent or one-off measures of traditional development and standard of living indicators. Impact measurement is also a crosscutting theme that can be combined with accelerator and incubator work and even plug into the research and experimental capacities of academia.

BUILDING THE ECOSYSTEM THROUGH SYNERGIES: Multi-stakeholder partnerships and efforts such as the IEIF have a more holistic view of the impact investing ecosystem, and therefore have a critical role to play in bridging gaps by fostering collaboration among key actors. Connectors in the ecosystem are unique in their ability to identify and subsequently bring together parallel or complementary efforts that, together, can achieve greater levels of efficiency. Moreover, connector organizations – usually in cross-cutting fields such as funding, technical assistance or networking – can foment a more collaborative approach to building the ecosystem and foster a greater level of transparency in the industry as it develops. Supporting synergies within the impact investing community by promoting common goals and shared resources can not only strengthen the ecosystem but also optimize results by maximizing resources through collective actions. With investor interest remaining strong in the region, political will gathering, and a host of accelerators, incubators and capacity development providers working together to build a functioning ecosystem, the question that remains is whether impact investing will live up to expectations and meaningfully resolve persistent societal and environmental challenges in Latin America and succeed where traditional development strategies have fallen short.

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Latin America Impact Economy Innovation Fund (IEIF) Partners would like toacknowledge the work and contribution of the following distiguished

individuals and organizations:

Celia CruzExecutive Director, Instituto de Cidadania Empresarial (ICE)

Elizabeth Boggs DavidsenPrincipal Investment Officer, Inter-American Development Bank

Robert De JonghSpecialist Leader, Emerging Markets Deloitte

Katia DumontRegional Chapter Coordinator for Central America and Mexico, Aspen Network of Development Entrepreneurs (ANDE)

Nicole EtchartExecutive Director, NESsT

Victoria FramDirector of Investments, Village Capital

Kusi HornbergerFounder, SIBM.co Social Impact Business Models

Francisco NogueraExecutive Director, Compartamos con Colombia

Robert ParkisonExecutive Director, Artemisia

Stephanie Cohn RuppChief Executive Officer, Toniic

Morgan SimonManaging Director, Pi Investments

Maria Elena SampaioProgram Coordinator, Instituto de Cidadania Empresarial (ICE)

Rodrigo VillarManaging Director, New Ventures Mexico

Paper prepared with the support of the following people: Lauren Booker, Carmen Correa, Emily Fintel Kaiser, Maya Gómez, Adrián Naranjo, Camilo Osorio, Guayana Páez-Acosta, Jessie Petrini and Nias Vahdat.

January 2015 Washington, DC

For comments and questions, please write to Avina Americas at info.aa@avina.net

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