The following is a contributed article by Gonzalo Costa, co-founder and managing partner at NXTP Labs, which claims to be the most active early-stage fund for tech companies in Latin America
Impact investing, a type of investment that offers a way to benefit the social environment while still maintaining a financial benefit, has been gaining momentum lately, with a reported $15 billion committed to impact investments last year, and a total market size estimated at $77.4 billion. Investors are reporting positive results, and 79% of those surveyed by the Global Impact Investing Network (GIIN) plan to increase their impact investments in 2016.
Some investors are drawn to impact investing because it no longer requires them to necessarily choose between having a social impact and receiving a financial gain, although in some cases there is a trade-off, depending on where in the philanthropy-market returns spectrum it falls. Impact investing generates positive social and environmental impact and provides a financial return, and its popularity is increasing, especially on a global scale.
Latin America represents approximately 10% of the total market, becoming the third most important destination for impact investments, while it continues to grow its share of the global market. At the end of 2014, $10.6 billion was committed to impact investing worldwide, and $2 billion of that was in Latin America. What’s more interesting, however, is that while much of the impact investment came from the United States and Europe, this trend is shifting towards an increasing amount of Latin American-developed impact investment funds.
The region presents two well differentiated groups, the first one comprised of Brazil, Colombia, Mexico and Peru (in order of importance), countries that have already developed an attractive and growing impact investing ecosystem. A second group, where we find Argentina, Chile, Paraguay, Uruguay and some Central American countries, are taking the necessary baby steps towards creating the right market conditions and a more welcoming environment for impact investing.
The concept of “going local” has taken off in Latin America as groups like Colombia’s Inversor and Brazil’s Vox Capital lead the way in impact investment in Latin America. There are now over 40 local funds in the region that participate in impact investing - and this number is growing as investors realize the benefits and opportunities of this practice.
Why Impact Investing is gaining popularity in Latin America
Latin America still has large wealth disparities and remains a financially unequal region in comparison with the rest of the world. While philanthropic, governmental, and even private companies are making efforts to reduce the poverty and inequality across the region, challenges remain. Impact investing in Latin America is one business model that can be used to address these challenges.
Furthermore, as more investment funds are created in Latin America, many of them are looking to foster sustainable good for the region. These investment funds have a more narrow geographic focus and can potentially become more successful and can add real value in terms of local insight for the investments they make.
Also, as Latin America is a region strongly dependent on commodities production and trading, there is a great opportunity in adding value and helping local industries become more sustainable. Asset classes like agribusiness, forestry, and renewables are highly attractive market verticals for international impact investors, because of the potentially large scale of these investments.
The Challenges that lie ahead for Impact Investing in Latin America
Impact investing as a whole has challenges. One of the biggest is the lack of investible opportunities - basically being able to find ventures that can grow and scale. While there are a plethora of ideas and talent starting to focus on impact, finding opportunities that can actually be built up and scaled can be difficult across the globe.
One way to address this concern, that Latin America is doing really well, is creating accelerator programs with highly skilled mentors that can help entrepreneurs in the social impact world. Agora Partnerships is one such accelerator program that has worked with entrepreneurs to create impact across 15 countries in Latin America. Other startup accelerators and mentors are helping social impact entrepreneurs get to the growth and scale level, making them more attractive to outside investors, essentially helping them become more “investment ready”.
Another challenge is the role of government in Latin America. In certain areas, the government can be a hindrance to impact investments due to regulatory and legal barriers imposed, as well as a lack of infrastructure and a fragmented investor base. The recent formation of Impact Investment Task Forces is a direct response to this challenge. These are usually led by private social entrepreneurs with a clear focus on facilitating the conversation and pushing for those necessary changes to happen.
However, as social impact entrepreneurs are putting forth more market-driven solutions to problems concerning housing, poverty, and education, governments are starting to take note of the positive value these organizations can create. Solutions like the UK’s Social Investment Tax Relief program, which grants a 30% tax break for social investments, could potentially be implemented in Latin America as well.
Impact investing is on the rise across the globe, and Latin America is primed to be a leader in this industry. The region can strongly benefit from social impact combined with the growing number of impact investment funds making it a region to watch.