The Development Bank of Latin America and the Caribbean (CAF) has launched a US$150 million impact investment fund aimed at financing businesses that tackle some of the region’s biggest development challenges while generating financial returns, with 20 per cent of the fund targeted at smaller economies in the Caribbean and Central America.
The VELA Fund, unveiled in Mexico City on Tuesday, is designed to attract private capital into sectors including biodiversity, the blue economy, regenerative agriculture, poverty reduction and financial inclusion. CAF is investing US$20 million as the fund’s anchor investor and hopes to leverage that commitment into a US$150 million regional investment vehicle.
CAF executive president Sergio Díaz-Granados said Latin America and the Caribbean are at a pivotal moment as they navigate both the digital and energy transitions, but public financing alone will not be enough to meet the region’s development needs.
“We have a great need to mobilise much more capital for investments that are capable of bringing about economic, social and environmental results,” he said.
“We need to close the financing gap, and therefore we need to increase productivity and investment.”
Díaz-Granados said multilateral development banks have an important role to play, but private investment must become a much larger part of the solution.
“Public multilateral resources are crucial, but they are not enough. This is why the private sector needs to be mobilised as an essential factor for the development of the region.”
He said the VELA Fund emerged after CAF’s shareholders approved a capital increase five years ago, prompting discussions about how the bank could better leverage private investment and reduce the risks that often discourage investors from entering emerging markets.
“We’re betting on a regional impact fund structured by a multilateral development bank with coverage in 25 countries in Latin America and the Caribbean,” he said.
The fund will focus on five priority areas: poverty reduction, financial inclusion, biodiversity, the blue economy and regenerative agriculture.
According to Díaz-Granados, these sectors represent not only some of the region’s greatest development challenges but also some of its greatest opportunities.
“The fund is not limited to providing capital, but it will also play the role of a catalyst to strengthen the regional ecosystem, mobilise private resources and promote best practices.”
He said the fund has also been designed to align financial returns with measurable social and environmental outcomes.
“We are seeking to demonstrate that it’s possible to align the interests of all stakeholders throughout the chain... and bring about social transformation and verifiable environmental change.”
Speaking to Guardian Media after the launch, CAF investment manager Alejandra Butero said the fund is intended to support businesses that solve development problems while remaining commercially successful.
“What is the investment vehicle of impact looking for? It is looking for entrepreneurs and funds that are looking to solve development problems, which is what a development bank does,” she said.
Those solutions include projects focused on biodiversity, the blue economy, regenerative agriculture, poverty reduction and financial inclusion.
Butero said the objective is to help businesses scale, create jobs and develop ideas that can be replicated across Latin America and the Caribbean.
“So that those models grow, generate employment, and those ideas can be replicated in other countries,” she said.
“Impact investing is, in a way, a perfect marriage for a development bank.”
She said CAF had deliberately built incentives into the fund to ensure smaller economies benefit from the investment.
“We have an incentive to allocate 20 per cent of the fund in the Caribbean and in the smallest countries of Central America,” she said.
“By definition, there will be a part of the fund allocated to its sub-region.”
The fund will be managed independently, with CAF setting broad investment parameters rather than selecting projects itself.
“We wanted this to be handled by an independent manager who has a very clear mission,” Butero explained.
She said entrepreneurs with businesses already operating in the fund’s five priority sectors are encouraged to apply through the VELA Fund’s online portal.
“If they have a project that is already running, that they think may be interesting for the fund, apply,” she said.
Another distinguishing feature of the VELA Fund is its emphasis on measuring impact. Every investment will be assessed against a baseline before funding and independently evaluated again when the investment ends to determine whether it achieved its intended social or environmental outcomes.
Those results will also affect how the fund’s managers are paid.
“If the impact objectives of the investments that are made are not fulfilled, they do not win 20 per cent of their total incentives,” Butero said.
She said each investment will also be included in an annual impact report, with independent verification used to measure the fund’s environmental and social performance.
Díaz-Granados said the success of the initiative would ultimately depend on identifying the right entrepreneurs, investors and projects.
“The success of this fund will lie in our capacity to identify investors, identify successful projects, identify the best and most responsible entrepreneurs, and bring about impact,” he said.
“This is a teamwork. We are turning a dream into reality.” (Kejan Haynes)
