Future Returns: Impact Investing in Latin America

Oct 2019
Latin America, October, 15 2019 - Home to eight of the 20 countries across the world with the highest income inequality, below average public health expenditures as a proportion of GDP, and ridden with hasty, unplanned urbanization, there is a budding class of entrepreneurs trying to reshape life in the region.

Latin America, a region of over 630 million people, has emerged as a space for impact investors to seek market-rate returns. Home to eight of the 20 countries across the world with the highest income inequality, below average public health expenditures as a proportion of GDP, and ridden with hasty, unplanned urbanization, there is a budding class of entrepreneurs trying to reshape life in the region.

Though the region’s impact investing market is still emerging, with assets under management of only about US$4.7 billion, it’s seeing rapid growth. An annual review from the Association for Private Capital Investment in Latin America (LAVCA) found that venture capital investments in startups grew four times, from US$500 million in 2016 to a record US$2 billion in 2018. While the association can’t say exactly how much is specifically impact related, Natalia Valencia, LAVCA’s associate director of Research & Responsible Investment says the trend is an upward one for that sector.

"It is a fantastic moment for the region," she says, noting that top Silicon Valley firms are investing, and their ticket size is growing. Additionally, Japanese conglomerate Softbank has set up a US$5 billion dollar innovation fund for technology investments in Latin America, including digital financial services and healthcare. New impact funds continue to spring up as well.

Here’s what Valencia says you need to know if you have your sights on investing to make an impact while earning returns in Latin America.

Look for Co-Investment Opportunities

"We’ve been seeing a lot of traditional impact investors co-investing with venture capital funds or even corporate investors," Valencia says.

This, she adds, provides startups in the region capital to keep growing. In the past there was seed and early stage capital available, but not anyone willing to sign the necessary checks for startups to keep growing.

Valencia says this validates that it’s a great opportunity to invest in the impact space.

"There is still this education that needs to be done because people believe that by investing in startups or in entrepreneurs [who] are solving issues and looking to measure their impacts, they are in a way sacrificing their return," she says. But the presence of more traditional investors co-investing in the impact space shows that they have investment returns in mind.

Valencia advises against making direct investments in firms, and instead thinks anybody looking to invest should partner with "someone that has already the experience sourcing the deals and investing in the region." This could manifest as investing with a fund manager or as a limited partner in an impact investing fund.

"Let them do the work and rely on their expertise," she says.

Take Advantage of the Online Population

Many impact investors that have been active in microfinance and agriculture have been investing in the region for quite some time now, Valencia says. But she thinks new investors should pay attention to Latin America’s tech startups.

"They’re trying to solve core issues like health care access, transportation, financial services, education, agriculture," she says. "Those, I think, are the five topics that are the key issues to make a great impact in the region and perhaps factors and sectors where for different reasons, the governments in each specific country haven’t been able to cover all the gaps and the needs."

The reason the tech world is so vital to these issues is attributable to the region’s high population of internet users—about 438 million according to Statista, making it the fourth largest regional online market. Valencia says, in particular, that users are active on their mobile devices.

The burgeoning fintech marketplace, which represents about 25% of the region’s overall venture capital investment according to LAVCA, is a particularly notable market, Valencia says. In Latin America, nearly half the population is unbanked.

"By investing in technology, you’re able to solve specific challenges and scale up very quickly versus, if you're doing it with a more traditional model."

Think About Unique Opportunities for Scale

Valencia says despite the differences among Latin American countries that there are many similarities.

"With the exception of Brazil, it’s kind of the same language, kind of the same culture, [and] the countries face similar challenges."

This enables companies to scale up across borders quickly, in a way that isn’t possible in other regions. Companies can go from a presence in one country to several markets across Latin America relatively quickly, presenting an attractive growth opportunity for investors.

Valencia offers the example of an agricultural startup from Colombia, connecting growers with restaurants, but points out that the model can easily be replicated in Mexico, Chile, and Peru.

Because of the efficiencies of tech-based startups and commonalities among regions, "you’re cutting a lot of steps of the supply chain, that would make it a little bit more cumbersome or a little bit more slow for you to scale," she says.

"That’s personally the beauty of investing in Latin America versus investing in developed countries, is that you’re actually solving problems." By contrast, she points out in more developed countries investments in apps tend to solve convenience issues rather than structural problems in society.

"You’re solving real issues and by investing in startups that are disrupting certain industries, you’re making [the disruption] faster," she says.

Source : Barron's

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