Innovating against Inequality: Impact Investing in Latin America

Latin America has historically been and continues to be the most unequal region in the world, with entrenched wealth disparities between its richest and the poorest citizens. In the past several decades, a combination of philanthropic giving, innovative projects (many led by TRF’s local partners) and government assistance programs has helped reduce that inequality, but challenges remain. To address poverty’s root causes, thought leaders in the region and abroad are continuously advancing new and creative solutions.

The past 10 years have transformed Latin America and the Caribbean into a regional incubator for innovative solutions to social issues. São Paulo, Mexico City and Bogotá have steadily attracted social enterprises: market-oriented organizations whose aims go beyond the “bottom line” to instead seek strong social or environmental impacts alongside financial returns. TRF has featured several of these enterprises in our “Business with a Mission”  series.

According to a 2014 report by Bain & Company, impact investment funds directed toward Latin America have increased nearly 12-fold from $160 million in 2008 to over $2 billion in 2013. Brazil, Mexico and Colombia – in that order – receive the largest portion of those funds as a result of the “hubs” that have sprung up in their largest cities to train, scale, foster idea exchanges and provide seed capital among the growing social enterprise sector.

Latin America’s social businesses seem poised for exponential growth over the next several years. It’s important, however, to note the unique obstacles of doing business in the regional impact investing space, and to identify ways to transform challenges into marketable opportunities for investors, organizations and the individuals who stand to benefit.

Scalability

Scalability remains a significant hurdle. Both social and traditional start-ups face difficulties in attracting capital and moving beyond the “pioneer stage”. Social enterprises, however, can experience impediments at various points in their development. A 2014 study by Monitor Deloitte identifies challenges at four levels: the firm, the value chain, public goods, and government.

At the firm level, many young businesses may require development assistance to improve appeal to investors. Investment supply currently runs ahead of demand in Latin America, which speaks to the recent emergence of the field and to the gap between organizations’ strategic capabilities and investors’ interest. Hubs and well-established foundations, such as TRF, can serve in a consultative capacity to help enterprises mature into capital destinations.

Business Strategy & Results Reporting

Insufficient strategies to incorporate consumers/beneficiaries into the business’s value chain, coupled with unclear impact metrics or poor industry infrastructure, are deterrents to sector growth. Measuring impact is a hot topic in the philanthropic world, and one that continues to be reworked and reevaluated. While global measurement systems such as IRIS and GIIRS are useful starting points, impact will ultimately differ for each firm and its target audience. Therefore, close collaboration with social enterprises to determine appropriate impact metrics is fundamental.

Combating these challenges will also rely on industry solidarity; fostering the growAdditional Photo for Body of the Textth of a single firm will not provide the necessary structures to scale entire socially focused industries. Investors, incubator hubs and foundations must cultivate a close-knit community of social entrepreneurs to share best practices and industry insights. To that end, TRF attended an Entrepreneurship Conference hosted by Agora Partnerships in Granada, Nicaragua, in 2014. The conference aimed to encourage solidarity and exchange of ideas among the region’s emerging social enterprise leaders and foundational entities.

Governmental Interference

Government can also hinder the growth of the social sector – but, as the International Development Working Group  asserts, an opportunity exists to construct “a more robust (social enterprise) ecosystem” by influencing policies and promoting public-private partnerships. The role of government is complicated in many parts of Latin America, and regulation and legal restrictions occasionally discourage creative investors. However, as more well-established corporations and foundations express interest in market-driven social solutions, politicians will begin to take notice. The pressing need for new solutions to social problems and the industry’s growing clout among the region’s literati serve as compelling motives for governments to welcome impact investing with open arms.

The opportunities in impact investing continue to grow, and many of the inherent challenges to advancing the social enterprise agenda can be overcome with creativity and leveraging of cross-sector networks. TRF is excited to join this growing community as we continue to develop our own impact investing program to create innovative new opportunities for our social investors, our nonprofit partners and – most importantly – the millions of individuals we assist each year.

 

By Daniel McCown, TRF Reporting Associate

Photo credit (top): Rose Flynn in Rio de Janeiro