Latin America: Primed and Ready for Impact Investment

Years of economic growth in Latin America has left socioeconomic disparity in its wake. Brazilian investment bank BTG Pactual explains how impact investment is looking to bridge those gaps

With much of the region still developing, what makes Latin America, and Brazil even more so, unique compared with other emerging markets?
We believe Latin America’s economic, environmental, and social diversity makes it unique, notably the region’s large territorial extension, untapped and diversified consumer base, and recent economic development. More acutely, we see increasing capital flowing into regional private markets due to the positive economic and currency cycles. Despite the recent growth, however, we believe that Latin American private markets are still in their infancy in terms of size and relevance.

Brazil’s low interest rates will support a substantial reallocation of local capital into private markets, as it has been doing in the past year. Its demographic may also open the door to impact investing.

This diversity also presents attractive opportunities for impact investing in Latin America, and has significant potential to foster the growth of this nascent sector. Of the $715bn in global impact-focused assets, Latin America represents only around 0.52% of that total. This low penetration, coupled with social and economic bottlenecks in development, has created a favorable opportunity for these assets.

Latin America has a significant need for sustainable infrastructure, particularly in energy, transport, water, and waste management. With fiscal restrictions holding back public investment in these areas, institutional investors are shifting their mindset and becoming important players in the development of this infrastructure. Furthermore, the demand from these investors for investments with a specific impact mandate is strong, potentially creating a mutually beneficial situation for Latin America and those who invest in the region. Brazil, for example, is one of the world’s richest nations in terms of its biodiversity; although much of it is heavily endangered, the country is seeing increased interest from investors focusing on fighting deforestation. 

What opportunities do you see in the various economies in Latin America, and which strategies are you hoping to approach those with?
Brazil aside, Peru, Chile, and Colombia have all seen significant economic growth over the past 10-20 years; however, that growth has been uneven and created considerable economic inequality. A large part of the population of these countries lives in poverty and lacks basic infrastructure services. Other challenges also exist relating to waste management and climate change mitigation, which lack essential investment to scale.

Against this backdrop are many small and medium-sized enterprises (SMEs) focused on addressing solutions to these issues. We believe BTG Pactual can boost investment into SMEs, enabling them to grow and be able to offer solutions to alleviate some of these socioeconomic issues.

Our impact investing strategy evolved out of identifying this opportunity for impact investing in Latin America. We recognized that it would leverage our ability to deliver both strong financial returns as well as environmental and social impact. Our strategy focuses on companies where we can promote a strong governance approach and active board participation, enabling us to work closely with the company’s management to enhance value creation and enforce impact opportunities.

Our team looks to generate impact through transactions that are aligned with the UN’s Sustainable Development Goals and offer scalable solutions to pressing challenges in the region.

What has interest looked like for these opportunities?
Despite the impressive growth of impact investing in Europe and North America over the past few years, Latin America remains in the early stages of development. Interest is only just gaining traction due to political and social issues in the region, which include calls for social reform and economic development, as well as the global challenges presented by the COVID-19 pandemic. We can see that our investor base is shifting their mindsets to more sustainable products and looking for alternative investments that consider ESG integration.

Another reason why investments in Latin America have been gaining momentum is that investors are realizing the region’s portfolio diversification potential, thanks to its low correlation to assets in the US and Europe.

The impact of the COVID-19 pandemic is yet to be fully understood; however, we continue to see opportunities to acquire quality companies at attractive valuations. Historically low interest rates have lowered corporate borrowing costs, potentially boosting returns to the end investor.

Given these tailwinds, our diversified investor base, which includes local and international institutional investors, funds of funds, family offices, and global ultra-high-net-worth families, has repeatedly requested that we pursue such an impact strategy. With strong interest from a broad range of clients, we also looked to democratize access to our strategy, offering it to retail investors with lower minimum capital requirements.
 

About Renato Mazzola
Renato Mazzola joined BTG Pactual in June 2011 and has more than 20 years of experience in the investment industry. He spent five years as Senior Investment Officer at the Inter-American Development Bank (IDB) and five years at JP Morgan. Renato holds a BA in Economics, an MBA in Capital Markets, and a Master’s in International Relations. He is a member of ANBIMA and Vice Chairman of Fundacao Estudar.