Impact Investing in Brazil

As far as I’m concerned, Rio couldn’t have been a more opportune location for the SEWF2012 given that I got to reconnect with various folks I had the pleasure of working with during my Frontier Market Scouts placement in Brazil and its successor in Colombia and now Central American beauty of Belize. A big Thank You to SEWF2012 event hosts NESsT for the student scholarship, FMS and my new employer Maya Mountain Cacao for supporting my bid to take part in the event! Any takers for the SEWF2013 in Calgary, Canada?

The event’s highlight for me were the parallel sessions that saw the almost 700 participants in the NESsT hosted event scramble through the 9 different options simultaneously available for each track in the massive venue. My topics of choice were (see http://www.nesst.org/sewf/agenda/tracks/ for info on speakers and topics):

Social Enterprise Strategies: National & Municipal Policies & Strategies for Fostering Social Enterprise

Equity Investments in Social Enterprise: Generating Financial and Social Returns

Models for Measurement: Models for Capturing and Communicating Social Enterprise Impact

Recycling & Reusing Capital: Debt Financing for Social Enterprise

Building the Pipeline: Challenges in Identifying and Preparing Investment-Ready Social Enterprises

Below are some of my big takeaways from the parallel tracks.

From: Social Enterprise Strategies:

The value proposition of social enterprises via – Lisa Nitze, Mission Measurement (USA)

Social enterprises:

• address social needs without having to increase taxes
• fulfill meaningful opportunities for those with barriers to employment
• create partnerships among stakeholders
• provide a sustainable approach to systemic change

And, most importantly social entrepreneurship as a movement provides a paradigm shift when it comes to the government’s role of build, do and educate to partner and leverage resources.

To develop, the social enterprise sector needs:

• clustered offerings for holistic solutions
• consortia to create leverage for purchase and sales (already happening through b corporation)
• template solutions to increase rapid sharing

Current innovation in social enterprises

• pay-for-success bonds (e.g. Instiglio’s SIB approach)
• public/private infrastructure innovation funds
• B-corps, L3Cs, Flexible Purpose corps

Continuing challenges:

• storytelling and making the case for Impact Investing
• government tracking field data
• awareness of major buyers
• lack of a single certification program
• lack of access to growth capital
• tax structures (incentives) lag behind field development
• lack of social enterprise case studies to learn from
• lack of training youth / human capital for the field
• lack of a single measurement and reporting standard that fits social enterprises in different sectors and regions

From: Equity Investments in Social Enterprise: Generating Financial and Social Returns

• Financial capital is most widely available for growth-stage businesses, least for early stage
• Pipeline building is typically outsourced to accelerators
• GIIRS was the common measurement standard among the funds
• Scale and impact – law of diminishing returns?
• Innovation
  • Vox Capital’s GP remuneration model – rewarding fund managers for social impact achievements by portfolio companies vs just financial performance
  • Foundations – Impact Investment Fund partnerships where the former invest in the latter to manage funds.. e.g. Instituto Alana – Vox Capital R$10M investment
  • Examples of portfolio companies and tendency to focus on scale largely favors digital enterprises

From: Building the Pipeline:

• Money is no longer a constraint for Impact Investing
• Capital Curve– forms of capital available is not enough of risk-taking from financing institutions.. Why?
  • Expectations are too high for social enterprises
  • Need for much more talent than is currently concentrated in the field
• Value proposition of impact measurement standards, e.g. GIIRS:
  • Outsourced due-diligence for investors be it philanthropy, impact-first or financial-first
  • Speaks to commercial firms/corporations (think CSR) in a quantifiable manner
• While investor readiness is difficult for social enterprises to achieve, so is accelerator readiness!
  • Missing link in the supply chain of social enterprises  – what kind of resources can bring ideas to life by the actual BoP/ enterprising poor

Some big ideas to close with:

Social Entrepreneurship / Impact Investing is undergoing a terminology and identity crisis.

The U.S. uses social business strictly as defined by Yunnus – with all profits (though very desirable) are reinvested into the business and no dividends can be collected.. In Latin America, social business is any entrepreneurial activity designed to address a social cause, however they choose to utilize the profit. Moreover, south of the border, social enterprise and social business are used interchangeably. To complicate matters further, a social enterprise in Latin America can be either a business or non-profit, a view shared by investing institutions as well. In the duration of the event I also heard impact business used interchangeably with social enterprise, and have to say there’s a need for etymological analysis and clarification. Implications – new links between the field and academia!

This is no news, but there is more willing capital than social enterprises, and the capital favors scalable models and thus certain sectors, esp. digital.

I personally see the latter part of the insight as a major flaw of this financing model, as it excludes very important sectors such as agriculture, where scale is harder to achieve to and even more difficult to sustain. Implications – same as above and tracking of trends in fund portfolios, addressing gaps with partnerships with philanthropic capital.

The Impact Investing field is very small. Everybody knows everybody, and while this creates risks of a closed-loop system when it comes to the question of including new players in the field, it also facilitates transparency and cooperation. With just under a year in this field in Latin America under my belt, I have no more than 1 degree of separation from everybody working in this space. Implications? There is a lot of room and need for new human and financial capital as well as new initiatives to fill existing and emerging gaps in the enabling environment.