Convergence recently participated in the Latin American Impact Investing Forum (FLII) in Mérida, Mexico, which saw over 500 investors, entrepreneurs, and ecosystem builders come together to network and share the ideas that are shaping the region’s impact investing space.
As a sign of its growing momentum in the region, blended finance was a main theme at this year’s forum. Convergence’s historical deals database has identified close to 80 blended finance deals in Latin America & the Caribbean since the year 2000, representing an aggregate value of $14 billion, with over $5 billion coming from deals in 2018 alone. Top investors in the region include Convergence members Calvert Impact Capital, IFC, and USAID.
According to our recent Data Brief on the leverage of concessional capital, the average leverage ratio of blended funds in Latin America & the Caribbean was 5.1x - as measured by dollars of commercially priced capital to dollars of concessional capital. This is larger than in any other region, the average leverage across all regions is 4x, in Sub-Saharan Africa it’s only 2.4x. These numbers offer strong evidence that blended finance has great potential to unlock private capital in the region.
Source: Convergence Leverage of Concessional Capital Data Brief
A number of interesting blended finance deals targeting Latin America have also recently entered the market. For example, in 2018 Convergence awarded Clean Energy Works (CEW) a grant to design Pay As You Save® (PAYS®) for Clean Transport, which aims to reduce diesel emissions and combat climate change by accelerating the electrification of public buses. CEW found that in Santiago, Chile, a PAYS investment for 100 buses can leverage more than $70 of investment capital for each grant dollar, while reducing overall grant requirements by 97%, generating $25 million in electricity sales revenues, and eliminating 62,000 tons of CO2 emissions. “Blended finance allows us to use high impact philanthropic capital to unlock mainstream large-scale capital from utilities,” concluded Holmes Hummel, founder of CEW, during our panel on blended finance trends and opportunities in Latin America.
The need for an entrepreneur-centric approach
A recurring topic throughout the week was that, similar to what we have seen in other regions, mainstream institutional investors are now considering social and environmental factors in their investment decisions. However, it is important to note that these factors are only complementary and do not replace the rigorous financial analysis that continues to drive the decision-making of institutional investors.
Therefore, in order to attract these players into opportunities with high positive social and environmental impact, investments must demonstrate clear and attractive risk/reward profiles beyond their alignment to the Sustainable Development Goals. In our view, blended finance, with its ability to pool assets and modulate risks, will play an increasingly important role in the region as entrepreneurs, deal sponsors, and impact investing funds adapt to speak the language of institutional investors.
Further, numerous investors, including Erik Wallsten from Adobe Capital while speaking on a panel on future directions of impact investing in Latin America, identified the need to be entrepreneur-centric. This means investors should introduce more flexibility to the investment instruments they deploy and increase the amount of assistance they provide to their portfolio companies. Both of these objectives can be accomplished through blended finance. For example, support from concessional capital providers can make it possible for fund managers to lengthen a fund’s lifespan, which may allow them to deploy investment instruments with more flexibility, including a longer time horizon.
In terms of additional support to portfolio companies, close to 40% of the 50 blended funds in the region have a grant-funded technical assistance facility. By having a dedicated source of funds to tap into for this exact purpose, portfolio companies can expect additional support from their investors, which may lead to better financial performance and more impact on the ground.
At FLII this year it was clear that the blended finance space in Latin America is rapidly expanding and there are no signs of slowing. As track records develop and first-time impact investing funds start raising capital for their second funds, there is a need to look back to lessons learned and realize that the market still needs catalytic capital to achieve the impact needed to meet the Sustainable Development Goals. Similarly, as social enterprises in the region mature and require more capital to fund their growth, blended finance can help unlock necessary private capital.