The latest trend in financing boasts a double or triple bottom line: returns, plus a solution to social or environmental problems.
"Impact investing" is the new buzzword in social development, an unlikely marriage between old-fashioned philanthropy and venture capitalism. The investment model, which considers the social and environmental benefits of a business venture on equal terms with its capacity to deliver return on investment, is being hailed as a way to direct more capital to solving problems in impoverished and marginalized communities.
The emergence of impact investing as a consolidated asset class is a new spin on what socially mindful investors have been doing for years, according to Rodrigo Villar, co-founder and partner in Mexico City-based Adobe Capital, a six-month-old fund dedicated to impact investing. So is the partnership between business and philanthropy.
"Philanthropy realized that to achieve scale, it was necessary to do business," Villar said. "Many times the problems are so big that philanthropic resources aren't enough. Some problems can be resolved with business. And the business sector came to the same realization."
What does a project look like?
FINAE, for example, is a Mexican financial institution set up to provide student loans to low- and middle-income students who want to attend a private university (often because they haven't gained entry to Mexico's overcrowded public university system). FINAE, which receives financing from Adobe Capital and the Inter-American Development Bank, works from the admissions offices of 10 major private colleges and offers payment plans at rates around 15 percent -- cheap in Mexico for a long-term loan.
Other projects range from low-cost diabetes and cataract treatment centers to an affordable distribution network for small mom-and-pop groceries to a banking program in corner stores that serve areas bank branches do not.
The way Ignia founder Alvaro Rodriguez Arregui sees it, "We’re not in the investing business. We are in the enterprise-building business."
Ignia, now six years old and one of Mexico's first impact investment houses, works alongside the businesses in which it invests, both to help improve their service, products and operations as well as to create an ecosystem that will support their success.
"To be able to help an enterprise grow, you have to be in the trenches with them," he said.
Today there are a handful of impact investment funds in Latin America: Adobe Capital and Ignia in Mexico; in Colombia, Fondo Inversor; and in Brazil, Vox Capital. All have been created in the past five years.
In Mexico, in addition to tackling the country's social ills, such funds patch a gaping hole in finance: the lack of capital available to small- and medium-sized businesses.
Three banks in Mexico hold 55 percent of assets, according to the International Monetary Fund. At less than 20 percent of GDP, the country has one of the lowest commercial lending rates in Latin America. (By comparison, Chile's commercial lending rate is over 70 percent while Brazil's tops 50 percent of GDP.)
While Mexico has a highly liquid private equity market, it tends to benefit only the largest companies. By contrast, Adobe Capital offers injections between $100,000 and up to $3 million to small businesses with a positive social or environmental aim.
Impact investments often require patient capital, given that innovative projects can require trial and error.
"These projects have a longer gestation period," said Rahul Desai, investment officer at the IDB's Opportunities for the Majority department. "You have to adjust business models. That means that once things work, the returns are good but it may take longer to work. Rather than taking four years, it may take seven."
Impact investing is happening worldwide; a similar instrument is the social impact bond, designed in England and recently launched in Africa. But Mexico offers especially favorable circumstances to test what impact investing can do, said Villar.
Mexico has a growing economy and a strong financial structure to support business growth, but, with nearly half the population living in poverty, the country also has a lot of challenges.
"We could be the laboratory for the world," Villar said.
Photo: Flickr/David Flores