The Impact of Impact Investment – A Chat With Root Capital
As with other impact investors, the rate of return is not the key issue for Root Capital. Poverty reduction and empowerment of small enterprises are highest on the wish list for this investor company based in Boston. For 13 years, the company has focused on smallholder farmers, primarily in Latin America, and also in Africa during the last five years. Root has provided 1,100 loans totalling $350 million to 350 different enterprises. The repayment rate of these loans is 98%, an impressive rate commercial banks have a hard time beating.
During last month’s SOCAP Design the Future in Malmö, Catherine Gill, vice president of investor relations, and Saurin Nanavati, director of Financial Advisory Services, sat down to talk about their business model impacts clients and their communities, but also its influence other impact investors.
’High Touch Lenders’
The problem in developing countries’ agricultural sector is neither demand nor supply, but the fact that the market mechanisms to make the two meet are malfunctioning. Enterprises and cooperatives cannot buy the produce from the farmers due to lack of working capital. Root Capital bridges this gap and provides finance to small and growing businesses (SGBs) in the agricultural sector, to be used for seeds and agricultural inputs, but also working capital and other expenses. When the enterprise later sells the crop on the market, it can repay the loan from the revenues.
“It is really not a complicated process, but to get there is really complicated,” Gill says. She explains that the key to their business model is to not only provide the cash, but also to build local competencies to handle the finances. A focus on training in financial management means that the investor needs to commit long term and create a relationship with their clients. By really engaging with their clients and acting as “a high touch lender,” the company is building up the businesses to be scalable enough to attract commercial loans.
“We are building up the organization to make them diversify their loans, a.k.a. getting other lenders. If or when that happens, that is a proof of success,” Nanavati says.
A Capital Niche Market
For obvious reasons, small scale lending to high-risk and financially illiterate clients in rural Latin America has not been big business. But things are changing and we are approaching a moment where more institutions will be looking at agricultural lending. They are, however, still mostly focused on the upper-middle segment where risk is not as high.
Root Capital is welcoming more investors on the market and is hoping that their business model will help other investors to see the viability of financing smallholders.
“We are looking to spur that entry, while maintaining a strong focus on the least served. We are trying to cover the barriers of entry by de-risking the smallholder farmers for other investors,” Gill said.
For more background on Root, check out this NextBillion interview with Founder and CEO Willie Foote.