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Eighteen months of extensive research and engagements with social investors in Asia, Africa, Latin America and Europe have revealed an important uniting fact about the field of catalytic capital: the practice is gathering pace in these regions, and there are untapped opportunities that could accelerate this much needed, positive trajectory.
To ensure that the deployment continues to grow, a key recommendation put forward in the resulting report Accelerating Impact: Catalytic Capital in Asia-Pacific, Latin America, Africa and Europe suggests that investors and funders share their lessons from the field, while also seeking knowledge from sources beyond their geographies.
Co-authored by AVPN and its sister networks, AVPA, Latimpacto and Impact Europe (formerly EVPA) the report finds that the four regions exhibit both unique and shared market realities. In gathering insights it became evident that it is the pioneer practitioners deploying catalytic capital who are best placed to share how they have navigated challenges and seized opportunities across the different regions.
To cap off this wide-reaching research effort supported by the Catalytic Capital Consortium, the four networks hosted a webinar Investor Insights: Understanding catalytic capital in Asia, Africa, Europe, and Latin America in which five panellists shared some hard truths, lessons and opportunities in Catalytic Capital across the regions.
Value Creation Takes Many Forms
Given that catalytic capital aims to fill capital gaps, investments can be long-term, focused in markets that are left behind, and in low-return sectors where even breaking even might be difficult. This runs contrary to the current narrative around impact investing which tends to focus on the potential for vibrant commercial capital markets that will scale, observes Harry Davies from Ceniarth. This is not the case for the underserved markets in which Ceniarth operates. For example, the single-family office supports wholesale lenders in the charity and social enterprise sectors in the UK, as well as place-based financial institutions in rural areas of the US. Davies says that in these contexts it’s important to remember that some sectors do need permanent subsidies, “but they create huge value for the communities they operate in.”
Building on this notion, Christine J Mwangi from WWF-Kenya raised the issue of creating dependencies, an unintended outcome that prompts questions about how to exit, and whether it leaves a business searching for another source of patient capital: “How do we win off these enterprises and integrate them in locally available financing, to ensure continuity of that business?” Mwangi shared an example of an initiative in Tanzania that required nearly two decades of patient and collaborative intervention that saw a once-unbanked community progress to attract financial institutions looking to set up microfinance facilities.
Be Adaptable in Local Contexts
Mwangi also touched on the false perception that there are no bankable or limited investment opportunities in Africa. The challenge, she shared, is that most investors are looking for working businesses, and that may not be the reality. It doesn’t mean opportunities don’t exist. This sentiment surfaced with the other panellists and in our research, which found that many catalytic capital projects are concentrated in markets that funders perceive as less risky, even though the need is less.
Perhaps a method for addressing this disconnect is to encourage funders who are looking to be catalytic to move away from prescriptive approaches. This was an idea surfaced by Audrey Selian of Artha Impact, the impact investing arm of Rianta Capital, which is a dedicated advisory to the Singh Family Trust. She acknowledges that while the right mechanism for identifying local needs may not be in place, “strategically, sometimes we have to be willing to bend, and we have to be willing to adjust and be opportunistic and open.”
Adaptability is an important characteristic in a Latin American context too, where many variables affect the social investment ecosystem and the growth of impact businesses, says Marcel Fukuyama of Din4mo, an intermediary based in Brazil. Macroeconomics, politics and legal factors all contribute to his view that catalytic capital can be used to mitigate risks by being allocated towards technical assistance, first-loss guarantee tranches or simply to structure operations given that transaction costs are high across the region.
Patience and Persistence Is Key
In Europe, which is the most established and developed market for catalytic capital deployment among the four regions researched, such investments are sometimes perceived to be costly, time-consuming and compete against market-rate returns. Karsten Zengerling of FASE – a corporate finance advisory firm for social enterprises put forward two ideas on how to address this when investing in impact ventures: Desrisk or increase returns through “impact-linked finance or other concepts.” He acknowledges that these concepts are new and not fully understood but there is no shortage of them or liquidity in the European market, and it’s coupled with a growing recognition that capital needs to flow towards impact. For catalytic capital approaches to become mainstream, “it will take a lot more time, a lot more patience and a lot more tenacity,” he says.
Delve into these insights in detail by watching the full webinar here: Investor Insights: Understanding catalytic capital in Asia, Africa, Europe, and Latin America and reading the report here: Accelerating Impact: Catalytic Capital in Asia-Pacific, Latin America, Africa and Europe.
