Does anyone make money through impact investment? Has anyone scaled up their impact enterprise in a meaningful way? The lack of historical benchmarks is an issue for #impinv investors, as well as for those of us looking to address gaps in financial intermediation (i.e. those of us who channel investor funds into ventures with social impact). We are all still largely reliant on anecdotal evidence of success and in that context, I thought I’d add my experience to the mythology. The deals described below span two decades of social finance work and include two investments that led to initial public offerings, a highly successful regional investment fund and a deal that confirms the opportunity thesis around investing in LFIs or “local financial institutions”. All of these were double bottom-line investments in Latin America.
Let’s make sure that our success stories see the light of day! If you’ve worked on successful impact investment deals (regardless of what you called them at the time), post a comment and share your experience. We all benefit when we can share good news – and given the current market volatility, we could all use a bit more good news.
1. Cultivos Marinos Internacionales (CMI) – Chilean-owned CMI planned to take a local scallop farming technique to commercial scale, with processing and exporting rounding out the value chain. The technology did not scale and had to be replaced with the prevailing Japanese alternative, but CMI managed to thrive and expand, acquiring additional aquaculture holdings outside of Chile. In 1994, the company went public on the London Stock Exchange under the name Sea Perfect PLC. My investment, on behalf of the Inter-American Investment Corporation (IIC), was subject to a put-call option that the company exercised prior to the London IPO, which capped the IIC return at around 20%.
2. BancoSol, Bolivia – A proposal to create a non-profit microfinance bank in Bolivia crossed my desk in 1990. In love with the microfinance idea (but finding “non-profit” and bank to be a non-sequitur), I reworked the numbers to show that a commercial microfinance bank could work. The sponsors agreed and on behalf of IIC, a made a $1mm investment that provided one-third of the capital needed to obtain a Bolivian banking license at that time. I was privileged to sit on the Board of BancoSol during its first three years of operation (and first change of CEO) and returned to the Board a decade later representing controlling shareholder ACCION International. BancoSol has become one of the world’s leading, profitable and innovative microfinance institutions, without ever losing sight of the market it was created to serve.
3. Banco Continental ABC – In 1992, I made an investment on behalf of the IIC in a small finance company owned by thousands of small banana and sugar cane farmers in Costa Rica that wanted to obtain a full banking license. After successfully completing its transformation, the new Banco Continental ABC was the 14th largest of 16 private banks in Costa Rica. Despite the challenges of providing good governance for its 3000+ shareholders, the bank was able to grow significantly and responsibly. In 1997, Corporación Continental ABC (the bank holding company) merged with widely respected Banco Banex, forming the second largest bank in the country. The IIC divested via a put option in 1996, locking in a 20+% return on investment.
4. ProFund, SA – The first special purpose commercial microfinance investment vehicle, ProFund was created in 1994 to address the capital needs of new microfinance banks seeking to replicate BancoSol’s success. On behalf of the sponsors and the Multilateral Investment Fund (MIF), my team at IIC conducted the market research for ProFund and designed the structure, administrative and operating policies. We hoped that by structuring ProFund using a typical venture capital type arrangement, we would make it more attractive for private investors to support microfinance. Although we didn’t bring much private capital into ProFund, the $22mm investment vehicle was quite successful. According to the International Finance Corporation, ProFund had the 3rd highest return on equity of all 1994 vintage private equity/venture capital funds in Latin America, just under 7%. For more about ProFund, read the CGAP case study (www.cgap.org/gm/document-1.9.2288/cs_12.pdf) or contact Omtrixinc.com for more information.
5. Banco Compartamos – When I joined ACCION International in 2006, the CEO told me that I would have to sell one or more Gateway Fund holdings if I planned to make new investments. Following a portfolio review, we called in the investment banks to advise us on the best way to sell half of our stake (slightly under 5%) in then Financiera Compartamos. The Financiera had recently converted to a commercial banking, and a number of long-standing shareholders expressed an interest in the liquidity prospects offered by the investment bankers. ACCION agreed to shelve its independent plan and work with the Bank and other shareholders to arrange a single liquidity event. Thanks to a perfect storm of market conditions, the Banco Compartamos IPO was four times oversubscribed and commanded a price of 13 times book value from the qualified institutional buyer (QIB) market. For more insights on the Compartamos IPO, read my presentation at the June 2011 MicroNed conference on Impact and Microfinance (http://www.micro-ned.nl/nl/news/26/microned-conference-report-2011). For an entirely different view, see also the CGAP Focus Note on Compartamos (http://www.cgap.org/p/site/c/template.rc/1.9.2440/)