Catalytic Capital | May 29, 2024

In Brazil, ‘empathetic capital’ is helping preserve investee impact and investor returns

Bruno Girardi

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Guest Author

Bruno Girardi

There is much debate on the tradeoff between impact and return, yet little is discussed about the strategies to ensure how this tradeoff encourages and scales impact investment. Sitawi has 16 years of experience in impact investment, focused exclusively on impact-first projects. At the beginning, our partners worried that potential managerial and business fragility of impact-first projects (compared to return-first impact projects) would lead to an unattractive financial performance. However, as of March 2024, our default rate is only 4.27% and our portfolio has generated financial returns above inflation. 

To achieve this favorable risk-return dynamic, despite our focus on impact-first, Sitawi has developed an empathetic approach to investment. This approach combines the principles of blended capital with venture philanthropy. To illustrate, let’s delve into a real case, from the perspective of Empathetic Capital: the investment in Na’kau.

Empathetic capital in Brazil

Na’kau is a chocolate company that uses Amazonian cocoa purchased from riverside and Indigenous agro-extractive communities in the Amazonas state. They pay cocoa farmers fair prices – 2-3,5x local market prices – providing families with increased financial stability and reducing their incentive to extract other natural resources. Na’kau contributes to the conservation of approximately 150,000 hectares of the Amazon Forest.

In 2020, the company raised BRL 215,000 ($42,000) on Sitawi’s Crowdlending Platform for Positive Impact and started paying the loan installments in May 2020. The resources raised through the Platform allowed Na’kau to purchase equipment to increase its factory’s production capacity.

Shortly after this investment and, therefore, significantly reducing the level of its liquid assets, the company was hit by the COVID-19 pandemic. At the time, product distribution took place exclusively in local restaurants and stores, which had lost their client flow during that period. Na’kau faced a significant revenue downturn, increasing its liquidity challenges.

The organization had to stop production and sell its chocolate inventory at low prices to generate cash and wait for authorization to resume non-essential activities. In summary, Na’kau had a factory with new equipment and was about to sign a large supply contract but could not generate revenues.

Opportunities for impact

At the same time, since the beginning of the relationship with Na’kau, Sitawi’s team identified several possibilities for improvement, and provided technical assistance focused on:

  • Sales: Sitawi helped Na’kau enter a large Brazilian retail chain by reducing geographic concentration, diversifying points of sale and exploring new commercial opportunities to boost revenue and mitigate factory idleness. This process involved a long negotiation, registration and implementation of the chocolate bar supply operation into this chain. This effort led to substantial growth for Na’kau.
  • Financial Analysis: Prior to the investment, a diagnostic revealed opportunities for improvement in generating data, financial reporting, and analysis. Following the investment, Sitawi and Na’Kau initiated an analysis of their product portfolio to evaluate the adequacy of Stock Keeping Units (SKUs) pricing. This examination uncovered that certain SKUs had a negative margin due to incomplete consideration of production costs. As a result, these SKUs were discontinued, ensuring a profitable and sustainable product lineup from both environmental and economic standpoints.
  • Loan Payments: In light of the organization’s challenges amid the pandemic but also of the demonstrated demand and operational capacity, by the end of 2020, Sitawi negotiated with 34 investors to suspend its debt obligations for one year.

At that time, this additional grace period was deemed sufficient for the organization to reestablish its activities, but no one could predict that the pandemic would last more than two years. Upon realizing that COVID-19 and its effects would have a more significant negative impact than expected – and considering the existence of demand and operational capacity – Sitawi leveraged its Solidarity Fund to pay off the debt held by investors, issuing new debt with an extended grace period and calibrated interests to the new payment capacity of a post-pandemic organization. That decision not only preserved investors resources, but also the investee’s finances and, most importantly, its impact potential.

Beyond patient capital

This ‘empathetic capital’ approach enabled Na’kau to prioritize internal strategies to expand sales. Now, they are up to date with the restructured debt obligations. In 2023, turnover increased 26%, reaching BRL 1.3 million ($252,000). New marketing strategies were essential to restore growth, and Na’kau expanded its customer base to over 250 national and international customers.

From an investor’s standpoint, this operation resulted in a longer term for the full repayment of the loan but also receiving all the capital back with higher-than-expected annualized returns. From an impact perspective, Na’kau continues to positively impact the lives of its employees and 150 families from cocoa-supplying communities while contributing to the conservation of 150,000 hectares of the Amazon Forest. Ultimately, generating financial returns and taking impact-first organizations to the next level requires going above and beyond patient capital, it requires empathetic capital.

To know more, download our publication “Empathetic capital: Socio-environmental transformation with real returns.”


Bruno Girardi is vice president of impact investment at Sitawi Finance for Good.