GUEST COLUMN: Why LatAm is luring 'impact investment'

Monday, December 22, 2014

By Ben Moody

President and CEO of Miami-based investment banking advisory firm Pan American Finance

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As the song goes, "You may say I'm a dreamer, but I'm not the only one." For those who invest in projects with the potential to make a positive difference in society – so-called "impact investing" – there is an opportunity both to change the world and to achieve positive returns on investment.

Impact investing has been expanding throughout the Latin American region, including in markets whose governments encourage such investments. In many Latin countries, investment capital for small to mid-sized businesses is limited and not easy to access, requiring owners to seek non-traditional sources.

Here is where the opportunity lies. Identifying well-managed but under-capitalized businesses, without the ability to fully realize their potential, can create positive change and can provide positive returns for investors who choose correctly.

One such opportunity comes in the form of renewable power projects that promise to transform Latin America's energy markets in the coming decades.

With dramatic declines in technology costs in this industry, investors can participate in explosive growth in a sustainable sector. In particular, both wind and solar power are poised to grow rapidly, given the region's great, untapped natural resources.

The US$425mn Penonome wind energy project in Panama, backed by InterEnergy and financed by the International Finance Corporation (IFC) and other lenders, is expected to begin to produce power in early 2015.

In Panama, the price of power is extremely high, and blackouts and brownouts are endemic. The power market is currently driven by hydroelectric energy, but during so-called "El Niño" dry seasons – such as the one we are currently in – this becomes problematic.

The Penonome wind project, which is expected to be the largest in Central America, provides great opportunity: for the Panamanian people, by re-balancing sources of electricity and reducing power prices; and for InterEnergy and its investors, who expect to achieve above-average returns on their investment.

Wind power is increasingly prevalent in the Latin America markets. From 2010 to 2012, Brazil, Chile and Mexico added 3.7GW of wind projects, collectively. Solar power is heating up as well, and the ceiling for growth is high, considering that Latin America only constitutes just 2% of the global demand for solar power.

Another opportunity is in businesses that provide non-traditional forms of financing, targeting people at the base of the pyramid, the "brotherhood of man" in Latin America that traditional banks don't serve.

And the knowledge of how these businesses work comes not from developed countries but from other emerging markets, whose people have the same needs. Bayport Finance, which has microfinance businesses across Southern Africa, sees a great opportunity to serve the large unbanked population in Colombia, which has the fewest bank branches per person of any country in Latin America.

Development Financial Institutions play a key role in supporting businesses that provide non-traditional sources financing. For example, the Inter-American Development Bank (IDB) has a specialist division, Opportunities for the Majority (OMJ), which is leading what is expected to be a US$50mn financing for Bayport in Colombia, designed to spur just this kind of impact investment.

The OMJ's goal is helping to "promote and finance market-based, sustainable business models that ... develop and deliver quality products and services for the Base of the Pyramid" in Latin America and the Caribbean.

And time is on the side of the impact investor. Timelines are more forgiving, and, given the stature and clout of supporting institutions such as IFC and IDB, impact investments often have protections against competitive constraints on their success.

Developers of renewable energy projects, protected by guaranteed revenue contracts, can offer very long tenured financing, in order to provide adequate returns to their investors. Impact investors working with these international organizations can afford to give businesses that make a positive difference the time to mature.

Impact investing can yield above-average returns, including (but not only) in the renewable energy and non-traditional finance sectors, and leading global investors are beginning to see the light. Each of these areas of investment can make the Latin American and Caribbean region a better place, while also providing a still untapped opportunity for impact investors.

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