NESsT launched a US$20m impact fund for Latin America, with a first close of US$3m with social investors, including DFIs, foundations, non-profits and philanthropists. The fund will loan an average of US$200k to small enterprises in Brazil, Chile, Colombia and Peru, targeting 80 investments generating employment for 30,000 vulnerable individuals.
(NESsT) Why, 20 years after our founding, did we decide to launch an impact fund? For enterprises such as Inka Moss, which purchases the natural resource, moss, from remote communities in the Peruvian highlands. While the enterprise has access to revolving lines of credit from a local bank, this capital is not sufficient to fulfill purchase orders from new clients.
NESsT’s impact fund provided a $170,000 loan for Inka Moss to expand its production capacity and long-term working capital.This will increase the number of moss collectors from 350 families currently to 900 by 2022.
How We Got Here
We tried to launch an impact fund before. We saw entrepreneurs in our incubation program not growing because of a lack of impact capital for early-stage businesses. Our idea was met with skepticism. A social finance expert told me that us raising a fund would be like “the tail wagging the dog:” a fund would distract us from our current work. So we shelved the idea.
But the problem didn’t go away and we wanted to do something about it. We created a database of 100+ impact investors and played matchmakers between them and our entrepreneurs. Despite many attempts, no deals materialized.
Inka Moss was not finding any suitors, despite the fact that it was profitable with a backlog of purchase orders to fill. Impact investors told us the deals were too small, too rural, too urban, too soon, too late.
In the meantime, our entrepreneurs grew, and stalled. We realized we had the envious position of having the pipeline but no capital. How to bridge the two?
What is the NESsT Fund?
With the help of Underdog Foundation, we designed our fund based on the community loan fund model. A flexible structure with patient capital that can provide long-term loans at reasonable terms to enterprises in the poorest communities.
In January, we launched the $20 million fund for Latin America. NESsT will lend to small enterprises in poor communities to increase their ability to grow and create jobs. NESsT’s small business loans will reach the most marginalized communities while rigorously tracking employment outcomes.
We achieved first-close at $3 million with social investors consisting of a development finance institution, foundations, nonprofit organizations, and philanthropists. The fund, which will make loans averaging $200,000 in Brazil, Chile, Colombia, and Peru, targets investments in 80 enterprises generating employment for 30,000 vulnerable individuals.
How is our impact fund different?
With its flexible structure, our fund provides a platform for social investors to invest in remote communities while generating high impact. We see our role as bridging the last mile distribution in SME finance. Our pipeline consists of enterprises sourcing from indigenous communities, biodiverse areas in the Amazon, and subsistence farmers.
Importantly, we’re passionate about job creation. We target enterprises that provide employment opportunities to individuals making less than the minimum wage and working in the informal economy.
Our key measures of success are to see communities:
(1) increase their incomes by at least 25%
(2) improve their job security through formal contracts. We measure these measures (and many others) through annual surveys we conduct in the field.
What is next?
Our goal is to build an initial lending portfolio of 12 enterprises.
Over the course of making deals, we will determine the best way to structure pre- and post-investment business services since our borrowers need hand-holding when it comes business management and – in particular – financial reporting.
We will also share learnings with the sector by publishing Jobs Impact Reports highlighting how our impact fund is changing people’s lives through small business loans for growing enterprises.