Alternatives, Asset Allocation, Asset Managers, ESG/SRI, Institutional Investors, Private Equity

IDB Launches LAC Gender-Focused Fund; Says Region Ripe for Impact Capital

IDB Invest, the private-sector arm of the Inter-American Development Bank Group (IDB) and the Overseas Private Investment Corporate ( OPIC) have  partnered to launch Fund Mujer, the first gender-focused fund for Latin America and the Caribbean (LAC), to invest in female entrepreneurs, companies with a significant share of women leaders, and firms that generate jobs or consumer products for women. The fund has a $200m target and is expected to comprise 70% equity and 30% debt, according to Pablo Verra, head of equity and mezzanine investments at IDB Invest.

Pablo Verra, head of equity and mezzanine investments, IDB Invest.

The LAC region has relatively underdeveloped private equity markets compared to developed markets and other emerging regions (see related IA story). That condition applies to impact investments too. But, according to Verra, the region is of growing importance to the world economy, with a plethora of sustainable development goals (SDGs), some of which may represent attractive impact investment opportunities for institutions. IDB is seeking investors that have an interest in co-impact investing with Ait in the region, he said. “We [IDB Invest] are often approached by and are seeking other like-minded investors who want to co-invest with us, utilizing our development standards, or who would like us to establish a trust for IDB Invest to manage their investments under its criteria.”

Impact investing means different things in different emerging markets, even in regions so close as the different LatAm countries

Impact investments are private-sector projects that combine financial and social returns to contribute to poverty reduction and promote sustainable economic development (see related IA stories IA, 9/26, IA  9/26). For perspective, the United Nation’s Sustainable Development Goals 2015, which were agreed to by 135 countries, commits to ending poverty, protecting the planet and ensuring prosperity for all by 2030. The goals imply a $2.5 trillion annual investment gap globally.

Though IA could find no source of investment return metrics specific to LAC impact investing, a research collaboration beginning in 2015 between Cambridge Associates and Global Impact Investing Network (GIIN), a New York-based advocacy organization dedicated to increasing the scale of impact investing, that aims to create a complete analysis of the financial performance of market rate private equity and venture capital impact investing funds, now boasts an underlying dataset for the benchmark that include 71 funds, all seeking market rates of return while targeting social impact objectives. Classified by vintage year, 8% of the funds began investing between 1998 and 2001, approximately 32% between 2002 and 2007, 27% between 2008 and 2010, and the remaining 32% between 2011 and 2015.  Classified geographically, 39% of aggregate fund capitalization focused on Africa, 37% on the U.S., 17% on a mix of emerging markets, and the rest on a mix of developed markets.

According to Seeking Alpha, the 2015 study made the following points:

  • Since inception, the 71 funds have generated aggregate net returns of 5.8% on average, with 4.6% showing up as the median.
  • The fund level internal rate of return can vary a good deal. The top 5% of funds get 22.1% or higher and the bottom 5% lose 15.4% or more.
  • That range itself is “similar to what is seen in conventional investing and illustrates that fund manager selection is key to strong performance.”

Also, 48 investor exits from impact investments in India (2010 -2015) produced a USD internal rate of return of 10%, and the top one-third yielded as USD IRR of 34%, according to GIIN.

“There is an increasing degree of awareness about impact investments in LAC, both from the perspective of investors and companies,” Verra says. “Multilaterals like us, IFC [International Finance Corporation], CAF [Development Bank of Latin America] and other players have been gradually pushing a dual financial/developmental approach towards private equity. In addition, there is an emergence of dedicated private impact funds,” he said, pointing as an example to Blue like an Orange Sustainable Capital Latin America Fund I, a mezzanine impact fund with a sole focus on Latin America, with which IDB Invest has partnered to maximize its mobilization capacity. The fund, which targets financing for small- and mid-size businesses in Latin America and has ambitions of  mobilizing more than $1 billion for investments in sustainable infrastructure, agribusiness, education, healthcare and access to finance, had its first close of $100 million in September. The fund has integrated the UN’s sustainable development goals (SDGs) into due diligence, impact target-setting for each investment, and impact monitoring throughout the duration of each loan.

Eduardo Grytz, managing partner, Performa Investimentos

“Impact investing means different things in different emerging markets, even in regions so close as the different LatAm countries,” according to Eduardo Grytz, a  managing partner at Sao Paulo-based Performa Investimentos, a social-environmental impact investment firm in Brazil with in excess of  $75 million in assets under management, focusing on the growth capital stage. The firm’s third fund, which has a $120 million target first close next March and a final close by the end of 2019, plans to invest up to 30% in LAC, in companies that plan to come to Brazil one year after the investment, Grytz said. The fund will focus growth capital investments in industries such as healthcare, education, clean tech, renewable energy and FinTech, among others sectors.

Brazil and Mexico, due to the size of those markets, existing large infrastructure, and sizable funding needs, coupled with active local capital markets and regulating agencies and institutions, are the LAC markets that Performa Investimentos considers the most attractive for ESG/impact investments, with U.S. institutional investors in mind. Grytz added that other attractive destinations are “Chile, Peru and Colombia for the growth of the economies, coupled with increased business-friendly institutions and capital markets, and Argentina for the quality of the entrepreneurial ecosystem.”

Regional Sustainable Development Goals

According to a presentation delivered last month by Verra at the Wharton School of Business of the University of Pennsylvania, short-term SDGs in the region include tackling environmental challenges, such as reducing waste, combating climate change and marine conservation, along with reducing slums, population and violent death.

There are now approximately $23 trillion of assets under management in responsible investment strategies globally, representing an increase of 25% since 2014 and a 135% increase since 2012, according to Verra.

I would like my audience to dismiss the myth that by prioritizing impact projects they are leaving money on the table.

A survey this year by GIIN, found that invested capital in impact investments globally increased by 32% and the number of deals grew by 27% from 2013 to 2017—$6.1 billion and 4,140 deals, respectively, in 2013 to $8.1 billion and 5,263 deals in 2017. Roughly one-quarter of the survey’s respondents said they invest primarily through private equity (26%) and private debt (24%).

Approximately 16% of impact investments are allocated to LAC, according to GIIN survey respondents. A majority of respondents indicated that their investments have met their expectations for both impact (82%) and financial (76%) performance since inception. Another 15% reported outperformance across each of these dimensions.  The report’s findings are based on survey responses from 229 of the world’s leading impact investing organizations, including: fund managers, banks, foundations, development finance institutions, pension funds, insurance companies, and family offices. In total, respondents collectively manage more than $228 billion in impact investing assets, a figure that serves as the latest best-available ‘floor’ for the size of the impact investing market, the report claims.

 

Regarding the sectors in which investors target for LAC impact investments, Verra points to the graph below from the GIIN survey:

 

Total assets under management allocated to impact investing in LAC in 2017 stood at $4.7 billion (there was a 49% increase in the number of deals and a 93% increase in the amount of capital invested), according to the LAVCA-ANDE 2018 The Impact Investing Landscape in Latin America report, released this month. The report, which is based on a survey of 67 investors conducted in February and May, also notes that the largest sectors for investment were microfinance (US$782m, 369 deals) and agriculture (US$300m, 276 deals), together representing 75% of the total capital deployed in the region. The report noted that the tech sector was a key area of focus, with information and communication technology capturing $146 million in the 2016 -2017 period. Survey respondents said they expect to increase capital available for impact in the region by US$1 billion each year in 2018 and 2019, both through new capital raised for fund structures and increased allocations to the region, and 64% of respondents said they expect to invest in more deals in the region in that time frame.  LAVCA is the Association for Private Capital Investment in Latin America, a not-for-profit membership organization dedicated to supporting the growth of private capital in Latin America and the Caribbean. The Aspen Network of Development Entrepreneurs (ANDE) is a global network of 290-plus organizations that propel entrepreneurship in emerging markets.

Challenges

Though environmental, social and governance (ESG) investing is slowly building momentum in Latin America, there are still a number of challenges to its growth. “Local knowledge and expertise and partners are very important,” according to Grytz. He explained that “each emerging market is different in terms of local gaps and necessities to be addressed by impact investments. Also, regulatory and business environments may be complex, and local industry connections count as well to assess the best investment opportunities and understand the more attractive themes and theses.”

Gender Parity

“One of the most pressing challenges for Latin America and the Caribbean continues to be how to close the workforce gender gap,” according to James Scriven, IDB Invest CEO, whom Verra quotes in his presentation. “The gender gap is present in all areas from junior to management positions,” Scriven said.

The objective of Fund Mujer is to narrow the gender financing gap in Latin America and the Caribbean by supporting investment strategies focused on female entrepreneurs, companies with a significant share of women leaders, and firms that generate jobs or consumer products for women, Verra said.

“Women-owned micro-, small- and medium-sized enterprises worldwide face a $1.7 trillion shortfall in access to finance. In Latin America and the Caribbean, the region with best gender parity in early-stage entrepreneurship, the business opportunity could reach more than $98 billion,” stated Gema Sacristan, chief investment officer at IDB Invest, in a press release announcing the fund’s launch. “With Fund Mujer, we are not only investing in women-owned and led enterprises. We are also investing in enterprises that provide quality employment and access to products and services that address critical barriers, so that we may enhance women’s economic participation and success…We are moving beyond merely counting women; we are also valuing women,” Kathryn Kaufman, managing director for Global Women’s Issues at OPIC, added in the release.

 

When asked what key point he would like the audience to take away from a panel discussion in which he plans to participate at Markets Group’s forthcoming Private Equity Latin American Forum in Sao Paulo, December 3-4, Verra said: “I would like my audience to dismiss the myth that by prioritizing impact projects they are leaving money on the table. Social impact is a profitable business and firms that ignore environmental and social matters will have a hard time attracting investors in the future. Furthermore, there is significant evidence indicating that impact investments largely meet investors’ expectations and usually surpass them, and that impact indices like FTSE4Good in the U.K. or the KLD400 in the U.S. have outperformed the FTSE and the S&P over similar time periods during the last decade.”

The IDB was established in 1959. It is the largest and leading source of financing for economic, social, and institutional development in Latin America and the Caribbean (LAC).

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