Like any profit-seeking venture, impact investing — deploying investment capital toward sustainability or a social good — targets positive returns. For that to happen, investors first need access to reliable data to inform their decisions. For too long, information on impact investing trends and investment flows for Latin America has been in short supply, despite an active presence of impact financiers throughout the region.
A new report released last week has started to fill that void.
The report is compiled by the Aspen Network of Development Entrepreneurs, the Latin American Private Equity & Venture Capital Association — abbreviated LAVCA in Spanish — and LGT Impact Ventures, an impact investor. It surveys financial investment firms in Latin America on their general practices and transactions over a two-year period to determine the main trends in impact investing across the region.
Latin America is home to a number of emerging economies with a strong entrepreneurial culture and low levels of extreme poverty. But the region is also characterized by some of the highest levels of social and economic inequality in the world. Boosting investments into small businesses that can have large-scale impact is often considered a key way to bridge the region’s inequality gaps.
Modest, but important
The actual findings highlighted in the report are neither staggering nor sweeping. The 78 firms surveyed for the report, for example, indicated that they invested $1.3 billion in impact investment in 2014 and 2015 — a modest sum compared to other more developed capital markets or even lower income regions that attract high volumes of private equity.
And indeed, those 78 firms do not constitute the entire universe of impact investors in Latin America. The report, for instance, did not count microfinance organizations or development finance institutions, such as the Inter-American Development Bank, as impact investors.
The study also identified Brazil, Colombia and Mexico as the three regional “hot spots” that drew the most impact investment capital. That should not come as a surprise considering the size of their economies — Brazil and Mexico are the two largest in Latin America — their higher standards of living compared to the rest of the region, and the upper middle income status of all three countries.
“I’m not shocked by anything I’ve seen here,” said Randall Kempner, executive director of ANDE.
However, the significance of the report has more to do with its use as a potential resource for investors than its great depth of insight about impact capital invested in the region.
“For the first time we were able to get quantitative data about individual impact investments driving the markets,” Kempner told Devex. “It provides a whole lot of color about sectors and is ‘manna’ for those [impact investors] that want to go deep,” he added.
The report gives investors an early indicator of impact investment trends. According to survey respondents, the top three sectors for impact investment over the two-year period were financial inclusion, agriculture and health. Its deep dive into Brazil, Colombia and Mexico also provides potential investors with lessons from those markets by quantifying the kinds of investors already engaged in impact investing in those countries, the market segments they are investing in, and the main types of financial instruments they are using to deploy their investments.
Impact investing is not necessarily a new practice in the region. Nearly 80 percent of the study’s respondents trace their initial impact investments to around 2007, which is approximately the time that impact investing started to formally take off and an official name was still being coined for the practice.
Since then, about 14 or 15 new firms have entered the impact investing space in Latin America every two years, LAVCA notes.
In addition, approximately 30 percent of impact investors in Latin America featured in the study are either private equity or venture capital firms, with the remainder comprised of foundations, nonprofit organizations and other financial services institutions, according to Natalia Valencia, a senior research analyst with LAVCA.
“The line between private equity and impact investing is blurring,” Valencia told Devex.
But to date, there is still a paucity of consolidated impact investment data in Latin America for investors.
“It’s a challenging place to collect private investment data,” said Valencia, in part because of the proprietary nature of financial information.
Kempner, meanwhile, suggested that since investors tend to hold a more tepid view of Latin America’s high-growth potential compared to places such as India or East Africa, those regions usually draw more quantitative investment analysis.
Latin America constitutes a modest portion of impact investing at-large. According to the 2015 Global Impact Investing Network’s Impact Investor Survey — a general bellwether of impact investing trends — 44 percent of respondents listed Latin America as a region of focus. Those respondents represent approximately 10 percent of the total assets managed by the companies that participated in the survey.
Global trends
But while impact investing is only occurring in modest sums in Latin America, the same is true for impact investing throughout the world, says Kempner.
“We still have not figured out a recipe to launch significant impact investment anywhere in the world,” he noted. “It’s still too much of a nascent industry.”
The firms in the report highlighted the challenges to impact investing in Latin America that are shared more broadly by the global industry at-large, such as obstacles to fundraising, finding investment ready deals and securing financial and social returns.
To bridge those gaps and grow the industry, firms say that more collective action is needed by governments, large corporations and universities to provide funding and create the proper incentives for impact investments.
Larger development finance institutions such as the Inter-American Development Bank and the private sector-focused Inter-American Investment Corporation have developed strategies to deepen capital markets in the region to finance impact investments through credit guarantees and other debt-secured instruments.
But a critical component for attracting more impact capital to any region, Kempner notes, is having a proven track record of investments with key guidelines and learnings for a market. New surveys and reports such as this latest one are useful starting points toward that goal.
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