Impact investing refers to the investment practice that looks at environment and social impacts beyond financial return. Nowadays, many social venture funds are looking to fill the gaps between micro-capital and commercial bank by serving the 'missing middle class'. The target investee/borrower is usually of the size that is bigger than a typical micro-finance client, yet not big enough to be a commercial bank client; however, these social venture capitals are standing exactly where micro-capital stood about 7-10 years ago - they rely solely on donors' contributions and grants to remain operational because the high operation expense, credit risk, FX and country risks if lending to organizations in developing countries.
Such kind of social venture fund usually provide full-fledged finance, advisory, or both services to target clients. One of the most typical yet successful fund in this spectrum is Root Capital with clients in Africa, and Latin America. The Cambridge, MA based has three main business lines - Finance, Advisory, and Catalyze.
(William F. Foote, Founder & CEO of Root Capital)
Financial services extends loans of various sizes to borrowers for different purposes. Root Capital runs two types of portfolio - Sustainable Trade Fund (STF) Portfolio, and Frontier Portfolio. The STF portfolio consists of two major kinds of loans - mostly small loans to farmers for trade credit and pre-harvest purchase, and a small portion of large loans to farmers for equipment and infrastructure. While STF is the flagship lending arm of Root Capital, Frontier Portfolio is an experiment field for them, boosting sub-portfolios for Haiti, Food and Security, and Innovation.
Root Capital runs a very risky business because of all the underlying risks. While demanding financial return, Root Capital lends money to clients who carry a high credit risk in the regions with high country and FX risks such as Nigeria, Uganda, and West Africa.
The debate starts from whether Root Capital could achieve OSS. Half a year ago when they were trying to attract commercial money, they claimed that they could achieved OSS in he second half of 2013. Just a month ago, their plan was changed to 2016. While it is always good to be conservative, it does raise a flag to potential investors about its ability in doing so.
While most of these social venture capitals are still suffering operational loss due to the high operational expense and low yield, they are gaining support from social investors such as Gates Foundation. Many of them are trying model their business after the success of Root Capital but in different regions and target clients. This is the spot where international development organizations should step in the way like what they did for the micro-capitals for the past decade - provide the financial and operation to social venture fund to boost their growth, and prepare for this second wave of social enterprises.
