Social Capital Markets 2009: Investing at the Intersection of Public Good & Market Discipline
How can a blend of capital and partnerships help address a market failure? During the session on “Investing at the Intersection of Public Good & Market Discipline: The Case of Agricultural Finance,” a diverse set of panelists came together to explain the case of agricultural finance and Root Capital’s approach to providing public good using market discipline. Moderated by a leader in the field, Antony Bugg-Levine (Managing Director, Rockefeller Foundation), the panel included Namrita Kapur (Vice President of Strategic Partnerships, Root Capital), Richard Lautch (Treasurer, Starbucks), Preston Pinkett (Head of Prudential’s Social Investment Program), and Robert Schneider (Senior Alliance Advisor, USAID Global Development Alliance).
Ms. Kapur explained Root Capital’s three-pronged approach to finding the right mix of public good and financial investments. Root Capital offers a lending model for the “missing middle” using the strategy of “finance, advise, and catalyze” for clients that range from coffee farmer cooperatives to artisan associations. An example she offered was on cocoa farming in Tanzania. Cocoa farmers received assistance from local NGOs, but were still missing credit. Root Capital did their due diligence and found that all was well with the cooperatives, except that farmers were not good at bookkeeping. Before investing (finance), Root Capital offered training on technical services (advise), and worked with a range of global organizations (catalyze). The result of these efforts was 1000% (!) percent growth in sales by the end of the second year.
The range of organizations that Root Capital catalyzes includes partners that have a natural interest in their work with a segment of their clients, such as Starbucks, to organizations that are looking to add social impact to their financial investments, such as Prudential Financial. In fact, Starbucks just announced [SS1] an additional $2 million investment into Root Capital to improve the quality of life for farmers in Africa and Latin America, according to a statement of founder William Foote at another session during SoCap. For Prudential, as Mr. Pinkett pointed out, investing in Root Capital makes sense because they offer a business model to move people out of poverty and have the ability to see something where a commercial lender would see nothing. Finally, USAID sees Root Capital as an appropriate partner as part of their effort to create public private partnerships, and can offer credit guarantees to make sure that the capital evolves.
Part of an emerging theme throughout SoCap seems to focus on metrics, measurement, and monitoring, and this breakout session was no exception. Mr. Lautch explained that certain metrics, such as number of farmers, average holding size, and growth plans can be measured, but it would be useful to know the end impact to farmers and their families. Pulling the various partners onto the same panel provided an interesting perspective that each one needed to make the link for their organizations on why investing in Root Capital would bring the right mix of financial and social return. For each individual organization, the link was slightly different, but collectively, the importance of partnerships highlighted a common theme.
The debate on metrics and the healthy tension in discussion around the proper rates charged for risk revealed that numbers are an obvious driver in decision making; however, it was not lost that every organization on the panel was also raising questions on the level of social impact that their investments could have. Mr. Pinkett made the simple but crucial statement that you want to actually care about who you are lending money to – they are not just clients, but an important population to bring out of poverty.
While this particular breakout session focused on agricultural finance, the same blend of capital and partnerships could go a long way for many other issues. As Mr. Bugg-Levine touched on, the key is about addressing the conflicting agenda of building bridges to entry and simultaneously receiving money on return – a feat that organizations like Root Capital, along with their partners, are learning to accomplish around the world.