FIS – Fondo de Inversión Social (Social Investment Fund)

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FIS – Fondo de Inversión Social (Social Investment Fund)

Chile
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

EThe Social Investment Fund (FIS) is a private equity fund whose objective is to invest in companies and social institutions in need of funding to grow, achieve self-sustainability and enhance their social impact. In the long run, the FIS industry seeks to develop a financial intermediary specializing in social entrepreneurship.

About Project

Solution: What is the proposed solution? Please be specific!

Our solution is innovative as it creates the first investment fund of social impact in Chile, and one of the first in Latin America. The structure of private equity fund, as an investment vehicle for the purpose of mediate private capital to social institutions, is a practice used in international financial markets, which has successfully completed more than two decades. Notwithstanding the foregoing, the implementation of a fund of this kind in Chile is an innovation in the development of local social sector, a sector traditionally funded under schemes of private donations and government grants where the financial market has failed to offer creative solutions that enable enterprises and social institutions to access private capital and promote growth with social benefits that that entails. The FIS has a large market to serve because in Chile there are currently many profitable businesses and social institutions, operating in sectors such as education, environment, health, housing and microfinance. They offer products and services with high added value to the base of the pyramid and that generally have no access to formal sources of financing in the financial market. Through this first fund, the long-term mission of the FIS is precisely as a first bridge between the financial sector and companies and institutions operating in the social sector, demonstrating the feasibility of incorporating private capital to profitable social enterprise promoting the consolidation of a market for financial intermediaries, including private investment funds, which offer specialized solutions to enterprises and social institutions.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

The measurement of performance and social impact is an essential commitment of the FIS. However, the FIS is not yet operational and therefore do not have results that prove their social impact. For this reason, I will use this answer to explain how the FIS will measure the social impact of their investments. The FIS aims to promote transparency and accountability of projects in which it invests, in addition to reporting financial results, social. This distinction between social outcomes and social impacts: the former are more direct, immediate and easily measured, while the latter are long term and its measurement involves a higher cost. The FIS measures the social impact of their investments in three stages: 1. Social measurement in the process of selecting projects Each investment is decided by a committee after having passed a comprehensive application process. This committee is composed of professionals with experience in financial and social sector, including the Center for Public Policy at the Catholic University and the Social Observatory of the University Alberto Hurtado, two institutions with extensive experience in performance measurement / social impact. 2. Measuring social performance in the monitoring of projects The FIS does regular monitoring of the social and financial investments. For this, generate a baseline that allows us to measure the evolution of these indicators in the course of the investment. The results are reported regularly. 3. Social Impact Assessment Due to the high cost of impact assessments, the FIS do not perform or finance this. Thus, the role of FIS is to ensure the effective implementation of measures of impact for each case, supporting the relevant period, the areas to be evaluated, as well as access to financing.
About You
Organization:
Claro & Asociados
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About You
First Name

María José

Last Name

Montero

Your Organization

FIS - Fondo de Inversión Social

Country

, RM

About Your Organization
Organization Name

Claro & Asociados

Organization Phone

(56-2) 499 7600

Organization Address
Organization Country

, RM

Organization Type

Private Institution

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Your solution
Country your work focuses on

, RM

If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Latin America and the Caribbean.

Range of turnover in your target firms, in USD

$1-5 Million.

Average turnover in USD of your target firm

US$ 2,5 millons

Number of employees in your target firms

50-74.

Average number of employees of your target firm

60

Specify the size, average and range of expected loans or investments in each target firm

The FIS seeks to raise $ 5 million, and has already committed contributions for $ 3 million, which will be invested in no more than six companies and social institutions. The typical investment fund will be a credit of approximately $ 1 million, at an annual inflation rate of + 4-6% for periods of between 6 and 8 years. The Fund has a management fee of 2% per annum on capital committed to fund the management team. It seeks to invest in social enterprises and institutions consolidated, low risk, making it feasible to have a fund with annual financial returns of UF + 2-4% for its investors contributors.

What stage is your solution in?

Operating for less than a year

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Whether through direct capital investment in the FIS, through the provision of subordinated loans (under schemes of first loss, for example), or by guaranteeing minimum returns to private investors of the Fund, state agencies investing in the FIS will encourage private capital inflows to the market of enterprises and social institutions. Additionally, in the medium term, you are helping the creation and consolidation in Chile of an emerging market for financial intermediaries specializing in business and social institutions which have the potential to generate substantial financial returns and high social impact, allowing channeling private capital into solving public problems that have generally been considered a state responsibility. In the long run, will be validating a model of financing of companies and social institutions that has a high potential for replicability in other countries of Latin America. Then logically develops this argument:
i. From 2004 to 2007, assets managed by the Chilean high net worth families (ie families with financial assets of over U.S. $ 100 billion) grew at a rate of 13% compound annual, accruing to 2007 more than U.S. $ 71,000 million in liquid assets. This growth should increase the need for high net worth Chilean investors to give back to society, reflecting, among other things, greater resources for financing of enterprises and social institutions.
ii. The increasing wealth of Chilean investors are also generating increasing sophistication of how these meet their concern for social responsibility. Social investors today are not content to make donations, but they demand accountability of the management of their contributions, interest in the profitability and social and environmental impact of projects in which they invest.
iii. The Social Investment Fund (FIS) is proposed as a market-based mechanism to mitigate the current inefficiency in the allocation of resources in the financing of projects with social benefits.
iv. The FIS reduces transaction costs by providing financing to grow with terms that allow businesses and social institutions achieve operational self-sustainability, and thus access the formal financial market.
v. The FIS will adapt to the Chilean experience of similar international funds, using professional standards of transparency and "accountability".
vi. By investing in sectors such as microfinance, education, health, housing and environment, FIS provides the opportunity for private investors to fund solutions to social problems. By investing through a private fund, the investor gets an economic return on their investment while generating a high social and measurable impact.

What barriers does your proposed solution address?

Asymmetry of information, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity).

If you checked any of these barriers, describe how your solution addresses them

- Information asymmetry
In Chile there is mutual distrust between the formal financial sector and companies and social institutions. The companies and social institutions which are generally financed by donations, they have no professional standards of accountability and transparency in reporting usage and results generated with them. Added to this is that in this market there are no organizations that would centralize and publish financial information such as credit rating, nor audit firms specialized in the field. The lack of reliable public information makes more expensive the selection and monitoring of banks and financial institutions, preventing the entry of these sources of funding.
The FIS seeks to become a channel of information on various companies and social institutions nearby. For this information will be released from different companies and social institutions that run through your investment selection process (which includes, amongst others, financial and legal due diligence, preparation of financial models, projections of social outcomes, etc) as well as information acquired in monitoring their investment portfolio. With this, the FIS can prepare periodic reports to investors with information on various projects, plus the construction of index and sectoral benchmarks to measure the return on investment. This greater flow of information will allow other brokers to enter the market, with the positive consequences that entails.
- Lack of availability of financial products tailored to the needs of SMEs.
In Chile, banks and other financial institutions offer products designed to serve the needs of enterprises and social institutions. Usually, companies and social institutions in their development stage, require to enhance their growth in sales, so as to achieve income levels so that they can meet their financial costs with its profits. The formal financial market does not offer products that adhere to time limits, amounts and charges required by enterprises and social institutions in their development stage, to prevent many social enterprises survive.
The FIS, by having a philanthropic component, can provide solutions to suit the particular needs of each investment project. First, the FIS can offer loans at interest rates below those offered by the market. This gives access to social enterprises that today have no access to credit. Secondly, the FIS can offer longer term loans than a banck would provide. These longer terms may be up to 8-10 years (term of the Fund) and allow, for example, to fund educational projects that require investment in infrastructure without compromising the quality of education by the payment of interest and capital repayments of credit.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

Because FIS is currently not operational but is in a stage taking off, taking the amount contributed by U.S. $ 3 million, there is still no empirical evidence of the results or impact of this. Notwithstanding the foregoing, we believe it relevant to talk about the experience that exist in other social funds, by way of demonstrating the feasibility of the business model proposed by FIS.
Social investment funds have been established as an internationally proven solution, either in the form of funds that primarily seek to obtain financial returns with social impact in business, as well as funds that seek primarily to expand the social impact by ensuring a floor of financial returns. So there are, among others, examples of the Acumen Fund in the United States or IGNIA in Mexico, which demonstrate the success and the wide field with such instruments. The main role of these funds is a more efficient allocation of resources within companies and institutions both with social and financial returns.
The Acumen Fund is a venture capital fund global nonprofit that uses business tools to solve problems of global poverty. Acumen Fund theory is that small amounts of philanthropic capital, combined with ample doses of "nose for business", can build successful enterprises that serve vast numbers of poor. Created in the U.S. in 2001 with seed money from the Rockefeller Foundation, Cisco Systems and private philanthropists, Acumen Fund has now invested in more than 35 social enterprises, which benefit more than 36 million people especially in Africa and India.
IGNIA is a venture capital fund established in Monterrey, Mexico that supports the establishment and expansion of social companies with high growth potential to serve the basis of socio-economic pyramid in Latin America. IGNIA promotes entrepreneurship and generates social impact as well as producing attractive returns for its investors, providing effective responses to the enormous needs of low-income sector, both as consumers and active participants in productive value chains. In July 2010 completed the survey IGNIA U.S. $ 102 million, far exceeding its initial goal of raising between $ 50 and $ 75 million. Among the investments IGNIA has in its portfolio include Primedic, a highly innovative provider in health services offering unlimited access to consultations with medical specialists through a membership program available to individuals and urban families with incomes below $ 3,500 per person per year, and MexVi, a leading provider of integrated solutions for self-construction of low-income housing in rural and semiurban

How many firms do you expect to reach?

As the first fund, the FIS seeks to raise $ 5 million, and invest in no more than six companies and social institutions, with investments averaging about $ 1 million, at an annual rate of UF + 4-6% for periods of between 6 and 8 years.

What is the volume of private SME finance you aim to catalyze?

As the first social investment fund in Chile, the FIS islooking to start with $ 5 million, and already has committed $ 3 million. Depending on the success of the initiative it is expected to create new investment funds specializing in sectors such as education, health and microfinance.

What time frame will be required to reach these targets?

The FIS should finish his road show of capital raising in September 2010 and be fully operational and begin making the first investments that has already analyzed. These investments typically are for terms of 6-8 years, and the Fund as a whole will last 10 years.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

1) Subscription for less than the minimum bid of capital.
To the extent that you subscribe for less than minimum capital of U.S. $ 3.5 million, the opportunity to diversify the Fund's investments may be diminished.
2) Consequences of non-payment of capital commitments.
In the event that an investor does not pay any of its capital commitments when required to do so, the Administrator may reduce and / or terminate the participation of investors in the Fund. Moreover, if investors do not pay their capital commitments may deteriorate substantially the Fund's ability to perform its investment program or to continue their operations. The non-payment of capital commitments for a substantial number of investors investors or by one or more investors who have made substantial commitments of capital, limited opportunities to diversify the investment fund and probably would reduce the returns of the FIS.
3) tax considerations.
The FIS does not classify as a donation but as an investment and, therefore, has no tax benefits associated with donations in Chile. This can be a disincentive for some potential contributors.
4) Type of investment.
The FIS requires investment in long-term commitments, with no certainty of returns. The FIS can invest in companies and social institutions that are not operationally self-sustaining when investing, but have potential to be. FIS investments are highly illiquid, and there is no guarantee that the FIS can be paid promptly. Because the FIS can only have a limited number of investments, and because many of these investments may have high levels of risk, the poor performance of few investments can severely affect total returns to investors.

Sustainability
List all the funding sources that are required for the sustainability of this solution

Private investors: high net worth families seeking to satisfy their social concerns in an efficient, professional and informed manner.
Foundations: They can invest in social projects in sectors where they have no experience of the FIS through specialization in the management of social institutions. Moreover, by investing in the FIS, a foundation access information about best practices in the marketplace, generating the possibility of generating sectoral comparisons for which the foundations can assess their own management.
Development agencies, national (CORFO) and international (IDB, MIF): The ability to access funds from development agencies allow the FIS to enhance the contribution of private investors, generating greater social impact and lower costs of administration.
Initiatives of Social Responsibility (CSR) from private companies: The FIS is an efficient and professional way to outsource certain CSR needs without incurring the costs of time, planning and management typically entail.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The FIS is a proposal that does not depend on funding from the government. On the contrary, all contributions pledged so far come only from high net worth private investors. This validates the idea that there FIS interest from private investors to channel contributions to enterprises and social institutions that generate high social impact through an investment fund managed with high standards of accountability and transparency, and managed by professionals. In this sense we can say that the sustainability of the business model of the FIS is determined by its ability to generate financial returns for its investors contributors to invest in companies and social institutions that generate low risk and high social impact.
Public funding could enhance the consolidation of this model and its expansion both domestically and internationally. Leveraging private capital contributions from public development agencies would significantly increase the financial scale and social impact of funds such as the FIS, increasing confidence in the success of private industry, promoting the arrival of foreign capital and accelerating the consolidation of the industry both in Chile and Latin America. In this sense, the future development of an industry of specialized financial intermediaries, and the consequent strengthening of a market for companies that deliver solutions aimed at the base of the pyramid in Latin America depend largely on the effort they put governments and agencies unlock development, leverage and implement regulatory changes to encourage the inflow of capital from high net worth private investors in this development.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The FIS seeks to raise a capital of U.S. $ 4 - 5 million, mostly from private investors, with high net worth, who have already committed contributions of U.S. $ 3 million. These amounts involved are composed of contributions that are generally between $ 100-200000 per investor, there is not yet any contribution that because of its size can be considered as essential for the viability of the Fund and which might endanger the future FIS in case it was canceled.
Note that the input entered into the FIS can not be rescued before the settlement date of the Fund. The FIS financed projects are generally long term and illiquid capital intensive, not a secondary market exists that allows exit of an investment before the agreed time. This is the reason that the FIS has no exit windows, as a rule, for its investors contributors, these may recover their investment only at the end of the 10 year term of the Fund. Until two years before the liquidation of the Fund, all claims placed to be charged again be reinvested in social projects. Notwithstanding the foregoing, the Fund distributes annually as a dividend, at least 30% of net profits earned during the period, in accordance with the financial statements, except where otherwise adopted by the unanimous vote of the issued shares with voting rights.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Financial standpoint: we believe that the existence of partnerships with national agencies (CORFO) & international (IDB, MIF) is an essential factor for the success of a project w/ the characteristics of the FIS. Whether through the direct input of capital, or indirect via debt or quasi equity, the potential size of the first social investment fund in Chile can achieve is determined in large part by the support and credibility that will deliver development agencies.
Operational: the FIS has already signed partnerships w/ numerous institutions w/ broad relevance in the Chilean financial & social sector. Thus, the project has participation from the beginning of the Center for Public Policy at the Catholic University, the Innovation Forum (local think tank that promotes entrepreneurship&innovation), the Social Observatory of the University Alberto Hurtado (measurement experts social impact), AVINA, TechnoServe (NGOs worldwide leader in economic development of rural communities) & the Corporation Simon de Cirene (local experts in management of social institutions). & Barros & Errazuriz law firm through a contract Probono, & NEVASA Larrain Vial & who is acting as distributors of Fund.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

1) Lack of support from national and international agencies in the long term
The various international experiences are unanimous in stressing the importance that they have the national development agencies and international and major international foundations in the momentum necessary to develop the industry of social investment funds in a country. Whether investing capital in the funds or providing access to networks of investors, there are numerous examples of social investment funds whose success has depended largely on the support received at the beginning of a financial institution. Examples are U.S. Acumen Fund, which began with contributions from Rockefeller Foundation, and Ignia in Mexico that has received significant contributions MIF / IDB in its development.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

The FIS is a first mutual fund that seeks with its success to demonstrate the feasibility of using financial intermediaries, especially private investment funds, to channel capital from private investors towards companies and social institutions that generate high social impact and have potential for financial self-sustainability . As the first fund that is, the FIS has a target size relatively small ($ 5 million), may invest in various sectors like education, microfinance, environment, housing and health. Depending on the success of the FIS, and using all the experience it gained in the short-term goal it is to create social investment funds specializing in specific areas where such demand exists to justify this. It is planned, for example, a fund specializing in education, one that specializes in high environmental impact projects, one in social housing, etc.. These funds could be larger in size than the FIS, which may include financial and investment conditions different, to make more efficient the collection of social impact as the specific type of investment involved.
Another short-term objectives of the FIS, which depend on the success of the project, designing and building the necessary infrastructure for industrial development of social investment funds. Whether through the development of financial standards and measurement of social outcomes, as well as carrying out an extensive lobbying program to promote regulatory changes that benefit the contributors in this market investors, or even creating networks that allow investors accelerate the growth of industry, FIS is an important part of the responsibility to initiate the necessary steps to promote the improvement and consolidation of social fund industry in Chile.
In the medium term, there is the belief that this model should be exported to other Latin American countries, starting with the neighboring countries of Chile. Both Peru, Argentina and Bolivia, we have considerable potential to develop social enterprises and institutions operating at the base of the pyramid selling products or services which carry a positive social impact for consumers while generating financial returns it. Whether through country-specific funds, or by covering first fund companies and social institutions of various countries, the objective is to replicate the model of the FIS in other Latin American countries.