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Tag ‘ social venture fund ’

SVC/SE (Miami), March 17-19, 2010

November 3, 2009 | Comments Off | FairExchange

Fair Street’s main objective is to show how finance can support the development of Social Entrepreneurs. In our various reports, we emphasized the crucial role of finance in allowing entrepreneurs to successfully carry out their innovative ideas.

In the recent years, several conferences have taken place to allow the actors of the impact investing sector to gather, network and exchange ideas with the objective to extend their impact.

To that extent, we want to share with you a conference on Social Venture Capital and Social Enterprise focusing on Latin America, the Caribbean, and the state of Florida that is taking place in March-2010 in Miami. Fair Street is going to attend this conference and we strongly encourage you to do the same if you have an interest in the field or if you want to have a feel on the major shifts happening in this part of the world.

John Rosser, SVC/SE, Miami-2010 Founder and conference Organizer tells us more: “SVC/SE, Miami-2010 will be a major regional meeting place for Social Venture Capital and Social Enterprise- connecting capital to people, and ideas to funding. Miami is rapidly becoming a hub for Social Venture Capital/Social Enterprise for Latin America, the Caribbean and the state of Florida. This translates into sustainable regional economic and social development through social entrepreneurship”.

Spread the word and visit the web site: www.connectionmiami.com

Blue Orchard is the main commercial investor in the microfinance sector. Created in 2001 and headquartered in Geneva, Blue Orchard supported in the year 2008 more than 140 institutions in 40 countries .

Blue Orchard’s mission is to empower the poor world-wide and improve their quality of life by promoting income-generating activities through private investments in microfinance.

Practically, Blue Orchard creates a bridge between the international financial markets and the microfinance institutions (MFI) by investing in them through debt or capital.

Using innovative placement solutions and innovative financial tools, Blue Orchard favours the flow between the private capital markets and microfinance institutions. This enables Blue Orchard to generate an attractive return on investment while supporting the growth of millions of microenterprises. 53% of Blue Orchard’s clients are women and receive microloans oscillating between $50 and $8000.

Blue Orchard considers its investments in the MFIs as long-term partnerships and wants to be present at all their development stages. During our visit at CRECER, we observed that microfinance institutions strongly appreciate this approach as their capital needs vary along their evolution.

In order to be able to inject more capital within the microfinance sector, Blue Orchard launched its own private equity fund in 2007. On December 31st 2008, this fund managed $130m originating at 80% from institutional investors and at 20% from private investors. The fund’s results have been excellent up to now. This trend should maintain and enable Blue Orchard to remaining the reference institution supporting MFIs financially.

For more info, visit www.blueorchard.com

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Alterfin: Invest in a better world

July 11, 2009 | Comments Off | Financial Agents

One of the main challenges of the microfinance institution CRECER is to have enough capital to answer the growing demand for micro-loans while preserving its solidity. To face this challenge, CRECER needs the support of external investors such as Alterfin that provides it with financial backup. The impact of such external investors is huge as each capital contribution of $500,000 allows CRECER to provide credit to 1,200 additional people.

Alterfin is a Belgian Social Investment Fund based in Brussels. Its aim is to reinforce the North-South cooperation by investing in microfinance institutions and fair trade producers in the developing countries. With its investments, Alterfin wants to contribute to the construction of a financial network that is accessible for the most destitute.

Alterfin does not provide grants but invests. Through this market based financing strategy, Alterfin is able to raise more capital while reducing the dependency that charity involves.

Alterfin raises funds in the Western countries by emitting stocks for private investors. The stock capital constitutes the financial base that Alterfin uses for its investments. At the end of 2008, Altefin’s stock capital was worth €8.8m and had been brought by more than 1,200 shareholders.

In addition to its own capital, Alterfin manages a portfolio of €18m that belongs to the Swiss investment fund responsAbility. Alterfin also collaborates with the sustainable Bank Triodos which makes credit lines available for Alterfin thanks to the savings generated by its accounts.

Altefin mostly invests through credit (94%) with the rest of the capital being invested in participations or warranties. The size of the credits varies between $30.000 and $600.000 for a maximum period of 5 years and at an annual interest rate that fluctuates between 6 and 10%. The projects that Alterfin finances must have a positive social and economical impact on the local communities while being financially sustainable.

After more than 15 years of experience, Alterfin manages today a total portfolio of more than €25m supporting more than 60 initiatives that have an impact on more than 50.000 families. In 2008, Alterfin has met a 17% growth in capital.

For further information, visit www.alterfin.be

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CRECER: The video report!

July 11, 2009 | Comments Off | Enterprises, Videos

CRECER (Credito Con Educacion Rural) is a microfinance institution based in La Paz, Bolivia that focuses its activities on the development of rural communities in Bolivia. Using the “Village Banking” model, CRECER offers financial services combined with education programs to the most destitute Bolivian women. Changing the lives of more than 97,000 families, CRECER aims to build a financial network that the people at the base of the pyramid can access.

For more info, read the CRECER profile

Fair Street - Crecer from Angalio Productions on Vimeo.

Our sixth company visit takes place in La Paz, Bolivia where we have been warmly welcomed by the staff of CRECER, a microfinance institution. After a very interesting interview with CRECER’s management team, we went to “El Alto”, the poorest neighbourhood of La Paz, to meet microentrepreneurs and observe CRECER’s work on the field.

Problematic and context:

Providing access to capital to the people at the base of the pyramid is a key element to help them in getting out of poverty. Whereas the majority of the most destitute depends on loan-sharks that charge interest rates close to 10% per month, an access to credit at decent interest rates is a first step in their economic development.

Before the invention of microcredit at the end of the 70’s, the poorest populations in the developing countries could not have access to traditional credit as they could not comply with the lending conditions of the traditional financial institutions (proper ID, warranty, minimal deposit…). In addition, their financial needs were too limited to cover the cost of a classic financial operation and therefore did not appear as an attractive segment. Nevertheless, in most cases, these people owned small income generating activities but could not expand them as they lacked access to capital. In Bolivia, where 60% of the population lives under the poverty line, it meant that more than half the country could not develop an economic activity.

The apparition of microcredit allowed poor families to obtain small credits. Whereas traditional banks had always considered the poorest as insolvent, the reimbursement rate went over 95%. As a profitable industry generating a positive social impact, microcredit has met a skyrocketing growth in the last decades. From microcredit, it has enlarged to microfinance and now offers the marginalised populations a range of diversified financial services (credit, savings, insurance…)

Microfinance mainly targets women for two main reasons. Firstly, it has been proved that the impact of microfinance on the whole family is stronger when the loan is given to the woman. Secondly, as we already mentioned it in our reporting on Coronilla, women discrimination is a widespread phenomenon in Bolivia. They are still the target of domestic violence and do not enjoy the same level of recognition than the men. If it is encouraging to see that this situation has significantly improved in the last years, a lot still needs to be done.

The company:

CRECER (Credito Con Education Rural) is a microfinance institution that focuses its activities on the development of rural communities of Bolivia. Today, the company has more than 90.000 clients in the different Bolivian departments.

CRECER uses the “Village Banking” model. Concretely, CRECER works with “bancos communales” (village banks) constituted of groups of 8 to 30 women. CRECER’s credits to these “banco communales” can reach $800 but generally are around $300-$400. The members of the group self-manage the credits they receive and split the credit among themselves in function of their needs. However, whereas the women split the loan among themselves, the group shares the responsibility as a whole.

In addition to its banking operations, the innovation that makes CRECER special (even if it is not the only MFI to function this way) is that its financial services go hand in hand with an education program. All the women that receive CRECER’s loans have to attend training sessions that are aimed to enable them to better manage their microenteprise but also to deal better with other aspects of their daily lives such as health, children education, women rights…

This combination of financial and educational services is at the heart of CRECER’s model. People at CRECER are convinced that the association of these two activities is the best way to reach a sustainable rural development. In addition, with regards to their pure financial performance, they are convinced that the education program has a positive influence on the reimbursement rate.

Within its financial services, CRECER has recently started to offer individual credits and micro insurances. Up to now, these products have met great success. CRECER also gives a strong importance to the savings services; the members of the “bancos communales” must indeed save a part of the revenues they generate so as to have saved 20 to 50% of their initial credit at the end of the credit cycle. This obligation has two objectives: on the one hand, it constitutes an additional insurance for CRECER to be reimbursed and on the other hand, it teaches women how to better manage their patrimony.

Social Impact:

CRECER, by providing capital to more than 97.000 families has a positive impact in different ways.

Firstly, by offering credit and insurance services, CRECER enables the most destitute to be less vulnerable to external shocks. These populations are indeed particularly sensitive to events such as an illness, robbery, earthquake… as they have huge consequences on the families and their limited financial resources. Without efficient financial services, these families are brought down to a level of poverty from which they can take years to recover. In this case, CRECER’ services represent a safety net for these families that helps them in facing bad times with more serenity.

Secondly, by allowing thousands of women to become economic actors, Crecer enables them to empower, to affirm themselves and to increase their influence within society.

By providing credit, CRECER helps the poorest in developing their activity and therefore increasing the revenues they get out of it. This has a positive effect on food security, education, health and increases the probability that they can get out of poverty.

Through its association of financial and education services, CRECER increases the knowledge of many women in Bolivia which has a positive effect on the way they manage their household and educate their children. The trainings on savings combined with the obligation to save at least 20% of the amount they borrowed makes women aware of this matter and forces them to manage their budget on a conservative way.

Finally, at the macro level, CRECER’s actions also stimulate job creation and the integration of new actors into the economic system.

Financial impact:

As the majority of the MFIs, CRECER benefits from the support of several financial actors. Generally, these financial institutions are actors from the “North” that want to finance MFIs from the “South”. The close to perfect reimbursement rate and the professional management of MFIs are attractive arguments for investors. In addition, the reduced amount of intermediaries enables to generate a direct impact on the living conditions of the people at the BoP.

CRECER is supported by different Investment Funds (Oikocredit, Incofin, Alterfin, Blue Orchard,). In this case, Fair Street focused on the financial support it received from Alterfin a Belgian organisation and Blue Orchard, a Swiss organisation. As the demand for microloans is huge and the need for development urging in Bolivia, the support of such institutions enables CRECER to grow rapidly and serve a higher amount of clients while not endangering its solidity. Within CRECER, the impact is of such external investors is considerable as each $500,000 loan enables them to reach 1.200 additional families.

Alterfin is a Belgian Social Investment Fund that mainly invests in MFIs and cooperatives. Alterfin has provided two credits to CRECER at the LIBOR rate +3%: one of $600.000 and another of $700.000. Alterfin was one of the first organisations to support CRECER.

Blue Orchard is the largest financing institution for MFIs worldwide. It is based in Geneva, Switzerland and has recently invested in CRECER through a $2m loan (biggest loan CRECER has ever received). This loan has a 3 years period. Given the size of Blue Orchard and the size of its loans, CRECER hopes this collaboration will last long in the future.

Throughout the years, CRECER achieved to position itself as a solid and professional institution. As it received an A- rating and different awards for its strong social impact, it represents a very attractive target for the funds mentioned here above. CRECER will soon expand its offer to credit cards and savings management to build a financial network that is even more accessible for the socially and economically destitute people.

In 2002, Coronilla received $400 000 from the SEAF investment fund. This contribution, in debt and capital has enabled Coronilla to convert itself into a stock corporation and to develop its exports. In 2004, Coronilla has bought back its shares to SEAF.

Small Enterprise Assistance Fund (SEAF) is an investment fund based in Washington DC. It focuses on small and medium enterprises with high growth potential in developing countries by providing them with capital, technical and operational support.

SEAF positions itself as a sustainable and professional institution caring for the return of its shareholders. In addition to the financial return, SEAF wants to contribute to the economic and social development of developing countries. It uses its capital, its know-how and its global network to accelerate the growth and the sustainability of its investees with the central objective of allowing them to generate profit that beneficiates to local communities.

SEAF is structured in local teams that are present in markets that generally seem unattractive to traditional investors (they have recently opened a local office in Afghanistan). In addition to providing capital, SEAF offers technical and operational support to its companies helping them professionalising and improving their organisational structure. In the case of Coronilla, SEAF assisted Martha Wille in converting the family business into a stock corporation. Moreover, working with local teams and paying attention to the national culture is an essential element of the SEAF fund.

SEAF has invested more than $260m in more than 30 countries mainly in Asia, Europe and Latin America. Up to now, the fund has made more than 150 investments generating an average added value 1.7 times higher than the amount initially invested.

SEAF considers that investing in SMEs is a promising tool to dynamise growth in developing countries and to fight poverty. It focuses on companies having a positive impact socially and environmentally and exclude investments linked to tobacco, alcohol, weapons and other activities generating speculation or having a negative impact on society.

SEAF mostly invests using capital and debt. It pays a strong attention to the liquidity of its investments developing exit rights rigorously defined . It also favours a flexible approach to answer adequately the specifics of each enterprise.

The impact of SEAF is considerable on the financial and social aspects. It has been proved that each dollar invested by SEAF generates on average 12 dollars in the local economy. Its investments positively influence many stakeholders including employees, suppliers, consumers and the society as a whole.

The average financial return of SEAF’s investments is 21%. It is worth mentioning that the global return (Economic Rate of Return) rises to 66% if we include the social factors and the global impact on society.

SEAF is financed mainly through institutional investors (World Bank, European Bank for Development, Belgian Investment office, etc) willing to invest on a sustainable way.

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Following the interview of Michael Chu, here is a more detailed description of IGNIA Fund, the social venture fund that he co-founded and manages.

Founded in June 2007 and headquartered in Monterrey, Mexico, IGNIA Fund is a social venture capital fund that supports social enterprises with high growth potential. IGNIA builds bridges between financial markets and the « Base of the Pyramid » by providing capital to enterprises of this sector. Traditional investors are usually reluctant to invest in this sector as the incubation period is longer than for regular companies. As a consequence, social enterprises face major underserved financing needs. IGNIA’s founders believe that the market constituting the « Base of the Pyramid », has a huge potential. In Latin America, it is composed of more than 360m people whose purchasing power is valued to $520 billion.

In May, IGNIA completed his third closing bringing its equity commitment to $40,7m. The round was led with $5m from Soros Economic Development Fund, created by philantropists investor George Soros. According to Michael Chu, IGNIA’s fund raising have not been affected by the current economic slowdown. Moreover, it made it possible for IGNIA to come closer to its objective of $50m - $75m in equity. If we also consider the credit line of $25m provided by the InterAmerican Development Bank, IGNIA will have a total of $75m - $100m that can be invested in initiatives dealing with the most urgent problems of our planet. The invested amounts will vary between $2m and $10m for a period that lasts 12 to 15 years. In IGNIA’s founders’ opinion, this is the necessary period for having a major social impact.

IGNIA does not only focus on a specific industry and is willing to have a highly diversified portfolio. On the geographical level, its ambition is to go beyond Mexico and to participate to the development of the « Base of the Pyramid » in South America as a whole.

In addition to a major social return, IGNIA also wants to offer above average return to its investors (e.g. IRR 30%). If the two founders, Michael Chu and Alvaro Rodriguez, are convinced that social enterprises represent the future of our society, they also believe that a sustainable change can only be obtained through the development of entire industries (requiring the emergence of numerous companies). As the development of industries implies superior financial return, maximizing financial value is, together with having a social impact, one of the two pillars of IGNIA’s investor proposition.

IGNIA’s first investment is an equity investment of $3m in Primedic‘s capital, a Mexican firm based in Monterrey. Primedic provides healthcare to the most destitute people through an innovative membership program. The capital provided by IGNIA will allow Primedic to extend its services to other cities of Mexico. Up to now, the performance of this investment exceeded IGNIA’s expectations.

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The development of social entrepreneurs is made possible, among other things, by the financial support of institutions willing to have a social impact through their investments. They are the kind of financial agents that will build a more ethical and responsible financial sector. If they do not stand as the main source of financing for social entrepreneurs yet, the number of them willing to combine social and financial return is growing. Given the recent, innovating and promising character of these actors, Fair Street wanted to learn more on their investment strategy and on their ability to combine social and financial return.

Fair Street had the privilege to interview Michael Chu, co-founder and managing director of IGNIA fund, one of the first social venture fund active in South America (profile to be discovered in the « financial agents » section).

Senior lecturer at the Harvard Business School, Michael Chu is an expert in social entrepreneurship and in the sector of the « Base of the Pyramid ». Graduated from this same business school, he worked for the private equity Kohlberg Kravis Roberts after having begun his career at the Boston Consulting Group. During six years, he was the CEO of Accion International, an organisation that aims at fighting poverty through microfinance. In collaboration with Alvaro Rodriguez Arregui, he founded the social venture IGNIA fund in June 2007.

Fair Street : Can you explain what is a social venture fund  (or more broadly a social investment fund)? How do they differ from classic venture funds? In your opinion, are social investments riskier than traditional investments? What are the criteria’s for a “good” social investment?

Michael Chu: In my view, in its most basic definition, a social investment fund is a fund that focuses its investments on enterprises whose activities are deemed to have a positive social impact. This is the key difference with classic venture funds, in which the primary purpose is financial returns. From there on, there can be many different types of social investment funds. The IGNIA Fund which I co-founded, for example, is dedicated to invest in commercial enterprises dedicated to low-income sectors which will generate high social impact due to their activities (e.g. healthcare, housing, education, basic services for the base of the socioeconomic pyramid and supply chains that incorporate low income producers) and also above average financial returns.

I do not think that risk is a defining characteristic that distinguishes social investments from traditional investments. There are risky and safe investments in both social and traditional sectors. To emphasize my point, with the benefit of hindsight it’s clear that owning a share of Citigroup was much riskier than a share of Compartamos Banco of Mexico, where the average size loan is still under US$ 500.

My criteria for a good social investment is an enterprise that is capable of generating high social return (e.g. providing access to primary healthcare for low income populations) together with the creation of outstanding financial return (e.g. IRRs (1) in the 30s%). IGNIA’s investment in Primedic fulfils exactly those characteristics.

FS: As a manager of a social investment fund, how are you able to find the balance between social impact and financial returns when making your decisions? Doesn’t one of these variables eventually end up taking precedence over the other?

MC: At IGNIA, finding that only one of the two considerations is met is precisely a reason why we would decline a deal. For us, it makes no sense to just generate financial returns. My partner Alvaro Rodriguez and I could have done that by just sticking to what we were doing after we graduated from business school. On the other hand, if we find something of high social potential, we believe that meaningful impact can only be obtained through massive scale, which requires not only one firm but a whole industry, for which outstanding financial returns are essential. So for us, high financial returns is not a “nice-to-have” but an integral component to our theory of change and social impact.

FS: How will the current crisis impact the access to capital for social entrepreneurs? Do you think that following this crisis, people will invest a bigger part of their money in socially responsible institutions such as Ignia fund? Might the current events represent an opportunity for social entrepreneurs to gain influence in the public debate over the fundamentals of a more sustainable economic model?

MC: The current crisis will make access to capital difficult for everybody. Having said that, the latest two rounds of investment of the three we have had in IGNIA have been subsequent to the meltdown of global capital markets. We hope to continue with more investment rounds in the near future until we complete our fundraising goal.

While I would like to think that the current crisis will end up redirecting capital markets towards alternatives like IGNIA, at the end of the day this will be determined really by the actual results delivered by IGNIA.

FS: The debate you had in Geneva with Muhammad Yunus has been widely commented on the Internet…Your view is that market-based approaches and commercials means should be applied to organisations addressing the Base of the Pyramid. Could you please tell us more about this?

MC: Winning over poverty requires four conditions: massive scale, sustainability across generations, continuous efficacy (a model that gets better every day) and continuous efficiency (a model that gets cheaper every day). NGOs, philanthropy, developmental agencies can start initiatives but cannot on their own deliver scale or permanence. On the other hand, Governments cannot deliver continuous efficacy and efficiency. Business, i.e, market-based solutions, is the only way humans have known how to deliver all four of the necessary conditions simultaneously and consistently. But this is accomplished not through one individual enterprise. Business delivers this through the creation of whole industries. And I know of only one way to create an industry: an economic activity and above average returns.

One caveat, though. If you use market mechanisms to address social issues, you must also understand that the only way to ensure through time that the benefits of the additional value created do not remain solely with investors and managers but continue to flow to those being helped is through competition — open, transparent and intense. Then prices will drop, product variety will increase and customer service will excel. This is the enduring lesson of successful commercial microfinance.

(1) IRR: The Internal Rate of Return is a capital budgeting metric indicating the quality of an investment. It is the discount rate that makes the Net Present Value of the investment’s cash flow equal to zero. As any discount rate inferior to the IRR will provide a positive Net Present Value, the higher the IRR is, the better the investment will probably be.

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