ImpactAlpha, January 28 – Big-ticket venture-capital and private-equity deals, many of them backed by the ubiquitous SoftBank Group, made many investors take notice of Latin America last year.
But intentional impact investors who look beyond the headlines may find that fund managers able to structure creative and flexible term sheets are landing less flashy deals that may well be better values. Flexible capital is attractive to mission-driven entrepreneurs wary of traditional VC and its attendant pressure for fast growth and quick exits.
And it is such entrepreneurs who may be best equipped to build durable businesses that can scale up to serve the growing markets for high-value, affordable products and services for a growing, and restless, middle class. Many Latin America fund managers are ahead of their U.S. counterparts in raising “alt-capital” funds that can offer entrepreneurs term sheets that include flexible revenue-sharing and other creative financing terms.
“There are a lot of new funds coming to market that are more open to creative financial engineering,” observes Rodrigo Villar of Adobe Capital, an early-stage impact fund in Mexico that closed its second fund at $30 million last year. “Entrepreneurs and limited partners are, too.”
Adobe was an early investor in Provive, for example, which restores abandoned homes and helps families secure financing to buy them. The Tijuana-based company quintupled its revenues during the five years Adobe was an investor before exiting last year.
Rather than traditional equity stakes, Adobe has focused on revenue-based repayments in which young impact ventures share business proceeds with investors as they grow. Adobe’s return expectations are modest: investors are likely to get 2X to 3X return on their investment, rather than the proverbial 10X that venture capitalists target. “Most of the really great deals are related to impact,” says Villar.
Latin America’s banner year for venture capital investing was driven by eight- and nine-figure deals, particularly for fintech investments. SoftBank alone invested more than $1 billion from its $5 billion fund for the region, including in Rappi, a Colombia-based delivery startup, and Clip, a Mexican payments provider initially backed by Accion. Argentina-based digital lender Ualá has raised nearly $200 million, including from Tencent Holdings and SoftBank. Brazil’s neo-bank unicorn NuBank raised $400 million.
“This is the kind of capital that has never been seen before in Latin America,” SoftBank’s Andre Maciel told Bloomberg.
Even in bigger deals, impact-aligned investors are finding opportunities to deploy more flexible capital. Blue like an Orange Sustainable Capital, founded by former World Bank officials to catalyze capital to meet the Sustainable Development Goals, offers Latin American entrepreneurs the kind of “mezzanine” or structured debt financing that is well-known in Europe and the U.S. but less common in Latin America or most emerging and developing economies, “whereas these are typically the countries where it is really something that can make a difference,” BlueOrange’s Bertrand Badré told ImpactAlpha.
Structured debt, he ways, can be anything that’s neither straightforward equity nor senior debt. The flexible terms could include a grace period, recapitalization of interest, repayments tied to revenue-sharing and other provisions. BlueOrange has made three investments , including in Cabify, a popular ride-hailing service; Ecuadoran small business lender Produbanco; and Grupo Cimcorp, one of Brazil’s largest information technology service providers.
“For an entrepreneur, the capacity to provide flexible debt instruments which are really customized to satisfy the expectations of the entrepreneur has way more value,” he said in a podcast interview. “You have very few providers of flexible financing tools and that’s what we are bringing to the market.”
Local and regional investors are bringing flexible capital to smaller deals to tap opportunities in affordable housing, education, healthcare, alternative energy. Impact entrepreneurs, in particular, appreciate such terms because it helps them maintain their commitments to mission.
Adobe and other funds that offer such “alt-capital” term sheets will be featured topic at this year’s Foro Latinoamericano de Inversión de Impacto under the theme “resilient investing.” The track “showcases new trends and flexible financial tools that help achieve a more profound and scalable impact. (ImpactAlpha is a media sponsor of FLII 2020; subscribers get 50% of with code ImpactAlpha_FLIIX. Learn more.)
Institutional investors like Mexico’s $15 billion baking giant Grupo Bimbo are tiptoeing into impact investing. Bimbo seeded the Latin America Impact Fund, a new impact fund of funds, through its employee pension scheme (see, “In institutional shift, Grupo Bimbo anchors an impact fund of funds in Latin America”). Impact startup accelerator NESsT has raised $3 million from investors who recognize early ventures need a flexible loan fund to address their persistent lack of working capital or funding to cover short-term inventory expenses.
Other deal terms can directly incentivize social impact. Root Capital makes small investments in agribusinesses across Latin America with a lending structure that offers bonus payouts for achieving impact targets. Such social impact incentives, says Root Capital’s Willy Foote, are a game-changer because they help Root and other institutions “lend to the enterprises that need it most.”
Blended financing has been key to many of Latin America’s environmental impact investments. The Eco.business Fund, which invests in sustainable agriculture, fishery, forestry and tourism initiatives in Latin America and the Caribbean, raised $60 million in debt to lend to organizations like GNB Sudameris Bank in Colombia, which finances local businesses aligned to international environmental sustainability standards. Costa Rica-based EcoEnterprises Fund is raising a $100 million third fund to boost sustainable livelihoods in agriculture, ecotourism and forestry sectors.
Althelia’s $115 million Climate Fund invested $6.5 million in an initiative to restore degraded areas of Peru’s Amazon. The Tambopata project’s unique deal structure was designed to demonstrate how forest carbon credits could be harnessed to finance large-scale conservation and boost local farmers’ livelihoods. Sales of the carbon credits were initially disappointing; project developers had to be nimble in developing other revenue streams, including sustainable cacao production (see, “Can carbon credits and cacao outcompete gold mining and deforestation in Peru’s Amazon?”).
Mexico’s Ejido Verde project also leads with an environmental angle, using forest conservation as an opportunity to empower indigenous families. Last year, it secured a $2 million loan from IDB Invest to build and maintain 1,250 hectares of native pine trees on communally-owned indigenous lands, known as ejidos.