Blunting the impact
June 30, 2020 |
Billions in public sector aid and loans have been committed to Latin America and the Caribbean to help the region overcome the COVID-19 pandemic. In the private sector, it prompted one impact investor to take early and bold steps to support borrowers, putting to the test the nature of his investment premise: business is a powerful way to eliminate poverty
The checks were in the mail to Ted Levinson’s investors, with the cash available to cover them earned from loans made to small socially-oriented enterprises throughout Latin America and Southeast Asia.
“But I cooked up this idea and asked them not to cash them,” said Levinson, chief executive officer and founder of Portland, Oregon-based Beneficial Returns, an impact investment firm that has been lending money directly for about three years.
It was mid-March and COVID-19 had yet to truly explode in Latin America. However, with the pandemic spreading at an alarming rate and his small borrowers vulnerable to the kinds of societal disruptions seen elsewhere, he put his 20-plus years of financial sector experience on the line.
Levinson convened a conference call with his investors and said the firm itself would not take any interest payments from borrowers for three months, no matter what, and he hoped the investors would accept the same kind of payment holiday.
“So for three months we are delaying our net interest income. That is hard for us,” he said.
The decision by his group of 12 investors, who are from charities and family foundations, was immediate: they too would take a three month payment holiday, sparing Levinson from drawing down reserves to make good on his obligations.
“We may not have reached the crescendo in Latin America, but we certainly saw what was going to come,” Levinson said in one of a series of interviews with LatinFinance.
What he thought would be an awkward phone call turned into a brainstorm of what more they could do beyond accepting a three month hiatus on getting paid.
“Ted was definitely the first of our investors to send an email and provide a tangible solution for the short term… Instantly it was positive,” said Kayoko Lyons, director of impact investing with the New York-based Order of the Missionary Sisters of the Sacred Heart of Jesus.
The female Catholic religious order was founded in 1880 by Mother Frances Xavier Cabrini and has operations around the world.
“Everybody in the impact investing space knows Ted. He’s a straight shooter and really cares about impact and it was important for us to find someone who does best for his clients first and foremost,” Lyons said.
Beneficial Returns, Lyons said, differentiated itself by offering patient money, with loans of five to seven years, which is “much better than what they can get in the local market.” She said he charges the borrowers between 5% and 8%, which is “particularly good for these kinds of businesses where there is a gap in the market for these types of financing.”
Some of the companies Beneficial Returns has made loans to include caffeinated drinks maker Guayaki from Brazil; Art Atlas from Peru, a fashion garment company that counts major US brands such as Eileen Fisher and Kate Spade among its clients; and Guatemala’s Ecofiltro, a maker of low-cost water filtration systems.
"We thank you and each of your investors, since this measure will help us sustain the Ecofiltro operation in Guatemala in these times of crisis, and to continue bringing purified water to people who need it," Sergio Munoz, Ecofiltro's chief financial officer wrote Beneficial Returns upon hearing the news of the payment holiday.
Loans have also been made to companies in Mexico, Paraguay and Ecuador. In the case of US-based Interrupcion Fair Trade, a business that imports organic, fair trade, and biodynamic produce from Central and South America, Beneficial Returns funded equipment purchases to support 1,900 blueberry farmers in Chile.
“These are small companies but they have a big impact on the communities in which they are operating,” he said.
Levinson says he is looking to continue to build upon his $2 million portfolio, while small, from the $1 trillion pool of capital sitting in family and community foundations in the United States. Approximately 93% of that money sits unused, he said.
“Unlike a grant, our investors get the money back but also a 2% financial return. They can still make a dent in poverty in Latin America and get their money back to give more away in the future,” he said.
And the need to support poor communities is likely going to grow.
The International Monetary Fund ratcheted down economic activity rates for 2020 in late June, with the global economy expected to shrink 4.9% this year followed by a 5.4% rebound in 2021. The Latin America and Caribbean region is now expected to see economic activity drop by a 9.4% in 2020 followed by a 3.7% rate of growth next year.
In May, when the grim data for the LAC region was just marginally more optimistic, the poverty rates were forecast to surge as a result of the pandemic, according to the United Nations Economic Commission for Latin America and the Caribbean.
At the time, when the estimates were for a 5.3% contraction in GDP and the 3.4 percentage point increase in unemployment, the poverty rate was expected to rise by 4.4 percentage points in 2020, from 30.3% to 34.7%, ECLAC reported. That would translate into a further 28.7 million people falling into poverty. “Extreme poverty is expected to go up by 2.5 percentage points, from 11.0% to 13.5%, which represents an increase of 16 million people,” the report said.
In that scenario, impact investing takes on even greater importance and in many ways an increased interest by investors, globally, in the sector could possibly deliver greater benefits.
Levinson laments that while European and US impact investors are heading toward Latin America to make investments there is very little home grown impact investing where there is no lack of wealth and talent.
“It makes no sense that a gringo like me has got to go to places like Ecuador or Guatemala or Chile or Brazil or Paraguay to invest in social enterprises when there is no shortage of billionaires and philanthropists far more qualified to do this kind of work,” Levinson said.
“I need to hop on a plane, hire local lawyers, work in a foreign language. There’s something a little wrong with that. I don’t need to be bringing foreign money. There is enough money already there and enough wisdom to make a big dent in poverty,” he said.
Social and environment-focused investing is seeing a rapid uptake by investors all over the globe, perhaps one of the biggest beneficiaries from the pandemic. Investors are asking to boost ESG (Environmental, Social ang Governance) assets in their portfolios.
The pandemic is impacting all levels of society, some harder than others, causing governments and private investors to adjust their focus on how they want to put their money to work.
According to the IFC, part of the World Bank Group, there could be as much as $2.1 trillion invested for impact, but only about $505 billion is currently invested with clear impact measurement systems in place.
In late June, just over a year after the World Bank and the IMF launched the Operating Principles for Impact Management, the 100th investor, AvantFaire, signed on to the standards for how to manage investments aiming to achieve positive impact alongside financial returns. They join financial sector heavyweights such as BlackRock and UBS.
“The Principles continue to gain momentum with global investors, and the community of signatories is increasingly diverse, now representing 30 countries across six continents, with recent adoptions from investors in Brazil, Costa Rica, Mexico, India, and the United Arab Emirates,” Diane Damskey, head of the Secretariat for the Impact Principles at the International Finance Corporation said in a statement.
While the level of investment return from Beneficial Returns might not pique the interest of most investors, there is a growing universe of impact investors, with differing models who are servicing institutional investors to meet their performance goals.
The Global Impact Investing Network, a non-profit that tracks this sector of the investment management community, issued the 2020 edition of its Annual Impact Investor Survey, which calculated that nearly 300 impact investors, held a collective $404 billion in impact investments at the end of last year.
Latin America’s share of those assets was 12 percent, third behind Western Europe (15%) and the United States and Canada (30%), the report shows.
For some investment managers in the impact space, they are balancing the desire to do good with the clients intent on making a good return.
“The key is, if you know investor behavior, the majority of investors either can't or won't give up investment returns to do good. So if it's a real investment as opposed to coming out of their philanthropy bucket, then it's got to be a real investment that has a chance of generating market rate returns,” said Gloria Nelund, chairman and chief executive officer of Manhattan Beach, California-based impact investment firm TriLinc Global.
Affluent investors, Nelund says, look at their assets and worry they may outlive them and they also want to maintain their lifestyle.
“You might be the nicest, most wonderful giving person in the world. But if you can't live on a return, then you can't do it. The majority of the investable assets in the world are that way. Institutional investors, they can't because they have an investment policy statement that says, you must do this, you must generate this amount of return,” she said.
Nelund, with decades of Wall Street experience, including CEO of Deutsche Bank’s $50 billion US private wealth management division, formed TriLinc in 2008 after nearly two years of wanderlust and trying her hand at pure philanthropy.
“Pretty quickly, I realized that I wasn't actually made to be that person,” Nelund said.
Rather than turning back to capital market investing, she decided to focus on making private asset lending her model because she felt she could have a greater impact on the ground in emerging markets to help grow economies and that capitalism could help solve social problems.
“I realized that most of the people that were driving the industry at the time were coming at it from an aid and philanthropy perspective, which meant we weren’t going to drive enough private capital to this idea… but capitalism in a more responsible way is the solution to our problem,” said Nelund, who also sits on the Emerging Markets Private Equity Association’s Impact Investing Council.
The current problem of the pandemic has not left Nelund bereft of investment opportunities, nor is she holding off on raising capital during the health crisis.
“We still consider this a great time to invest,” she said, giving a nod to medical supply companies, food processors, personal health, technology and services that support remote working. She does not have any hospitality, tourism or transportation in the firm’s portfolio.
“We feel very optimistic about our portfolio in Latin America,” Nelund said because of the diversification in the companies they have invested in.
What kind of impact?
Even as the amount of money estimated to be available for impact investing varies, some philanthropic investors are dismissive of the current investment trends and the COVID-19 crisis will separate the wheat from the chaff.
“My concern with some of mainstream impact investing is that they want to have their cake and eat it too. Make money and do good. Now we are in a time when we are going to separate who is an impact investor and who is just an investor,” says Erik Schultz, co-founder of Thriive, an impact investor that lends to emerging market entrepreneurs.
The Sun Valley, Idaho-based family-run private operating foundation does provide lending, much of it in the form of grants with strings attached. The payback is to allow businesses to grow but the repayment is to make in-kind donations locally to pass along the benefits within communities. The foundation invests some of its endowment with Beneficial Returns and didn’t give a second thought to delaying its investment return.
“I’d rather do our part to ensure the sector survives and gets through this. If you sit by and do noting you’ll lose your money anyway… If you are an impact investor you have to step up with the tools to see these social and environmental enterprises survive,” said Shultz.
While both Levinson and Nelund, whose work is carried out with differences in the number of zeros written on investment checks and perhaps focus on different levels of acceptable returns, they both agree on the notion that ESG investing might be gaining a lot of notoriety but are cautious on just what kind of impact is being made.
In April, when the rate of infections were rising sharply in the United States and yet the stock market was roaring back from its March lows, S&P Global reported the major ESG funds were outperforming the benchmark S&P 500 stock index.
Media reports of continue outperformance has continued through the rest of the second quarter.
However, to Levinson, Nelund, and others, being on the ground with direct lending is best for delivering the greater impact. To investors like Shultz, porfolio-based ESG investing is not true impact, as it may be that companies have changed their procedures to fit models put out by the likes of the IFC. While encouraging companies to change their behavior is a positive step, the on the ground results from their operations may be harder to find.
“I think folks that buy shares in a publicly traded stock that may score well on ESG metrics, that may make them personally feel better about their investments. But I don't believe that makes any fundamental change in the world. If you buy a share of a publicly traded stock, you bought it, somebody sold it. And it doesn't really make a big change in the world,” said Levinson.
In the three months since the payment holiday, Levinson says the companies are on more solid footing and will be making their loan payments. But he hasn’t stopped there as the pandemic has not stopped squeezing emerging market entrepreneurs.
In May, Beneficial Returns teamed up with Santa Clara University’s Miller Center for Social Entrepreneurship to create the Truss Fund which support social enterprises with emergency funding on “very generous terms,” Levinson said.
“One thing that makes this crisis so different is that we all of us are feeling it. And I think maybe we're getting a little taste of what poor people all over the world have experienced for generations,” he said.