This post was originally published on the Huffington Post
For many, Latin America is associated with a laundry list of negatives: drugs, corruption, gang violence and transnational crime. However, our new report Harnessing Social Impact Investing in Latin America, helps to dispel some of these myths. In fact, in the realm of social impact investing, it is on the forefront of rapidly-changing global trends.
The report, published by the Atlantic Council, demonstrates that impact investing -- using investment funds and vehicles for programs and entrepreneurs that both make money and provide critical public services -- is reaching a crucial watershed in the region. Subtitled "Private Capital for the Public Good," we look at how business leaders are at the forefront of making financially sound investments that help make social progress in the realms of education, health care, and inequality.
By 2013 some 19 percent of impact investments globally were directed toward firms and organizations in Latin America. That is despite the fact that only four percent of impact investors globally are physically based in the region. A major reason for the popularity of Latin America among such investors is demographics. The region's middle class has expanded dramatically over the past decade, as sustained growth and targeted government programs have lifted millions out of poverty. A growing middle class puts new pressures on governments to deliver better social services, from education to housing to healthcare. Policymakers have struggled to meet these demands.
The spike in Latin America's youth population makes the problem even more pressing. Currently, 20 percent of the population is between 15 and 24 years old, and a growing number of them -- known as "NiNis" (neither employed nor in school) -- have few opportunities in the labor market. Here, impact investing can provide new avenues for technical education and job training.
Technology is also primary driver. Today's youth grew up as "digital natives" in a region where Internet penetration rates are growing fast and are expected to surpass 54 percent by 2015. Latin America's Millennials exhibit a strong entrepreneurial spirit and a deep concern for social justice, two ingredients for successful impact investing.
Still, the region remains the world's most unequal, and commodity-based growth limits its upside potential. Reaching the next level of development will mean greater competitiveness and increased productivity. This in turn will require improving human capital.
Social impact investment can play a unique role. As New York Times columnist David Brooks recently wrote, "[It] is not going to replace government or be a panacea, but it's one of a number of new tools to address social problems." In other words, where governments hit roadblocks, the private sector can step in.
So what do these programs look like, specifically? Our research takes a deeper look at developments in the region through a number of case studies spanning the private sector, government programs, and efforts by multilateral organizations -- what might be called the different spokes of the impact investing wheel.
Some of the most successful private funds include Brazil's Gera Venture Capital, Mexico's IGNIA fund, and the regional Elevar Equity fund. Elevar, for one, has distributed $94 million to more than eleven million households for services that include microcredit, rural health, and home improvement loans, with ROIs of over 20 percent. Multilateral funds, too, like the Inter-American Development Bank's Multilateral Investment Fund (MIF), have supported entrepreneurs when no one else would.
Then there are the entrepreneurs themselves, such as Grupo Compartamos, the largest microfinance group in the region with nearly 2.4 million clients. Another Mexican start up, FINAE, offers low cost loans for thousands of Mexican students.
The report tries to make clear that, although social enterprise is driven by the private sector, policymakers also have an essential role to play. Governments must enforce clear rules of the game and invest in core infrastructure, such as broadband Internet, to attract investment. Governments can also act as important risk-bearers, supporting promising, early-stage initiatives.
This latter role has been taken up by government-backed business incubators in Argentina, Brazil, Chile, Colombia, and Mexico. Start-Up Chile is the most acclaimed, and through it the Chilean government directly offers qualified entrepreneurs seed capital grants of $40,000. Mexico's National Institute for Entrepreneurship (INADEM) and IncuBA of the City of Buenos Aires are two other examples of the public sector playing a major supporting role.
While impact investing still faces a number of challenges to truly taking off in the region -- a lack of consistent metrics, a general dearth of startup capital -- these successes are real. They demonstrate that well-managed projects can have significant social impacts while generating financial returns that rival any other class of investment.
The work ahead of us is to find ways to build on this potential -- to identify entrepreneurs who are at the most precarious stage of development and connect them to the right capital and business networks.
Photo Credit: Peru Champs