MARCH 2020 Impact Investing In Brazil - ABVCAP

Sector FocusSector Focus [Education]Brazil has made progress in reducing illiteracy within the last 20 years, however,there are still 11.3 million illiterates in the country in 2018 (equivalent to 6.8%of the population), according to the IBGE (Brazilian Institute of Geography andStatistics). In 2007 the number of illiterates reached about 10% of the population.Illiteracy rate in Brazil in 2018 (%)18.611.56.87.215 y/oor older25 y/oor older40 y/oor older60 y/oor older* Considering the age range forilliteracy reference in the countrySource: IBGEGovernment efforts to ensure access to children of literacy age have beensuccessful and the illiteracy rate has indeed reduced. However, there is still aliteracy challenge for adults and the elderly, for example.The sector needs reforms and private investment to address some gaps, suchas misuse of public resources and low investment in training professionals andmaintaining the infrastructure of teaching locations.Brazilian government s investment in education is above the average of OECDcountries and Latin America. However, countries that invest less per studenthave a better performance in OECD’s PISA tests, where Brazil ranks 53rd ineducation among 65 countries assessed.11

Public education expenditures, in % of GDP, RAGBRARGPRTBRAZILSWEBELFINISLNORDNK1Average in science, mathematics and reading, OCDEaverage PNKOR-60-80-100Source: OECD Education at a Glance 2017; OECD pisa 2015Results (Volume I): Excellence and Equity in EducationThe most recent PNAD figures show that more than half of the population aged 25 andover (52.6% of this population) have only attended up to incomplete high school.12

Persons aged 25 years of age or over, per educationlevel in Brazil (%)4052.6%302010CompleteUpper GradeIncompleteUpper GradeCompleteHigh SchoolIncompleteHigh rate0Source: National Survey Per Continuous Household Sample (PNAD) of 2018, released bythe Brazilian Institute of Geography and Statistics (IBGE).One of the major problems in Brazil is the dropout in high school, which is dueto the combination of the need for young people to enter the labor marketassociated with traditional education, with poor technology, poor infrastructureand poorly paid professionals (by poor management and excessive bureaucracy)and with little autonomy.This result is supported by studies and research on the quality of educationcarried out by international organizations, such as the Organization for EconomicCooperation and Development (OECD), for example. In a ranking of 40 countries,Brazil ranks 40th in terms of the quality of elementary and high school education.One of the most relevant issues when it comes to increasing quality is improvingteacher qualifications. When we compare our teachers’ salaries to those in othercountries, the OECD data are alarming: the teacher’s initial average salary was13

US 13,971 per year for early childhood education, elementary and high school inBrazil in 2018, while the average for OECD countries ranged from US 30,807 forearly childhood education to US 34,943 for high school teachers (these figureswere taken considering purchasing power parity across countries).The difference is also evident when we compare with a closer country, Chile.There, the starting salary for early childhood education was US 23,429 in 2018.However, public education spending in Brazil is higher than the OECD average andthat of several countries best placed on the PISA test.In this context, Edtechs are on the rise in Brazil and can help to improve theeducation system and reduce costs by bringing technologies that can makeeducational business management more efficient as well as to propose more upto-dated and interesting formats for students.In 2018, in Brazil, 364 initiatives were mapped by Edtech Mapping 2018, carriedout by ABStartups with CIEB (Center of Innovation for Brazilian Education): 73% ofthe states have at least 3 and only 1 state has no initiative, even though there is alarge concentration of initiatives in the southeastern and southern regions. It isestimated that 70% of them operate in the SAAS (software as a service) model.Edtechs speciality operating in Brazil in 2018:Content Production61.6%Data Collection and Processes18.95%Information Supervision and Management4.94%Content Distribution and Sale4.67%Virtual and Enlarged Reality1.92%Career Coaching and Planning1.64%Communication and Interaction Tools1.37%Analysis and Reports1.37%Hardware and Devices0.82%Didactic Preparation and Classes Planning0.82%Nock Trial and Evaluations0.82%Development of Practical Abilities0.54%Adaptive Teaching0.54%Source: ABstartups and CIEB14

Sector Focus [Health]The Brazilian population is aging at a fast pace, and growth is estimated at anaverage of 2.7% per year until 2060, much higher than the average annual advanceof the general population (0.2%). According to IBGE projections, in the year 2030the number of elders will exceed the total of children between 0 and 14 years old.Currently, total health spending in Brazil is about 8% of GDP, with 4.4% of privatespending (55% of the total) and 3.8% of public spending (45% of the total),according to data from the World Bank of 2015. Even though the country hasan universal public health system, the expenditures differ from the pattern ofdeveloped countries with similar systems, such as the United Kingdom and Sweden(where public expenditures are higher).Health public expenditures (% GDP) 201514%12%BrazilSwedenUnited KingdomUnited StatesLATAM&Car AverageOCDE Average% of 44%40%31%36%27%22%14%18%9%1%5%0%percentileSource: own elaboration from data of the World Bank15

Health total expenditures (% GDP) 201514%12%BrazilSwedenUnited KingdomUnited StatesLATAM&Car AverageOCDE Average10%% of 40%31%36%27%22%14%18%5%9%1%0%percentileSource: own elaboration from data of the World BankA study published in 2018 by the Pan American Journal of Public Health estimatedthat, with current economic growth projected, Brazil could reach the goal ofinvesting 6% of GDP in public health expenditure in the year 2064 alone.Health management problems in Brazil, especially in the public network,where 75% of users are concentrated, are exactly the breeding ground whereHealthtechs can bring disruptive solutions aligned with global trends.In 2018, a study conducted by Distrito, an innovation hub, mapped 288 startupsin Brazil selected for the survey, most of which were marketplace and hospitalmanagement / PEP (electronic medical records).16

288Selected Startups in cs& Diagnosis1333Relationshipwith patients827Educationin Health2533Own 7FinTech &CRM13AI &Big Data6AI &Robotics12Wearables& IOT9Health sensors13Call center16126Genomics6Patients commitment15Fitness & WelfareExams8HospitalmanagementThird parties offerE-commerceCommunication1219Clinics management6ElectronicmedicalrecordNetwork ofclinicsPharmaceuticresearchCertificatesreports andprescriptionDigitaltherapiesInformation & accessTelediagnosis2Tele supervisionEquipment67TrainingBig Data &Analytics3WearablesSource: Healthtech mining report, 2018, Distrito.17

Sector Focus [Financial Services]With an annual GDP of more than US 2 trillion and a population of over 200million, Brazil has one of the largest consumer markets in the world. A 2017 studyconducted by the Brazilian Central Bank found that 86.5% of Brazilians over 15years old have a bank account and 44% of the adult population carry out creditoperations.The high concentration and high cost of services offered by Brazilian banks arethe main opportunities for new entrants that aggregate technologies and operatedecoupled from banking institutions. New players, especially fintechs, are closingthe gap left by traditional financial institutions and contributing to financialinclusion.In parallel, regulatory changes are stimulating competition. In 2013, the Braziliangovernment enacted Law 12.865, authorizing Brazil s Central Bank to act as aregulator. At that time, a new regulatory framework was launched, introducing theconcept of arrangement and payment accounts. The new regulations implementedsince then aimed to create competition, with non-discriminatory treatment ofparticipants and aiming on the protection of traders, free to choose the institutionfor depositing funds and the mechanisms to protect their receivables.Taking advantage of the conditions created in this new scenario and matchingservices to market demand for increasingly digital services, Brazilian fintechs areplaying an important role in creating future-oriented solutions for the future ofbusinesses and consumers and benefit from their flexible structures at a lowercost, so they can pass on the gain to the user.However, according to the Social Impact Thesis on Financial Services, a studydeveloped by Artemisia jointly with ANDE, social impact fintechs differ in theirability to customize products for specific audiences. The study states that one wayis to adapt conventional products, correcting difficulties of the product offeredfor low income; simplify inbound products - redesigning products to improve thearchitecture of choice from deep knowledge of target- audience -; and simplifyingthe language for consumers to assimilate product benefits and trust the systemare some of the key assumptions.Among the opportunities for entrepreneurship detected by the Social ImpactThesis on Financial Services are solutions for increased digitalization; constructionof credit history; trust-building products; and products that empower the user forconscious financial choices.18

Increasing digitalizationThe scalability provided by digitalization has the potential to reduce customer acquisition costs and operation costs, making fintechs’ services more accessible andattractive to low-income users.Data for credit accessThe low-income population using no banking services - or those who make little useof financial services - cannot access credit because they have no track record infinancial institutions. Faced with this challenge, the second opportunity arises: theuse of unstructured data to build history for this portion of the population.Trust-Building ProductsLocally focused communication and solution services that generate identificationand belonging with the population from low-income communities; and services withhybrid assistance (on off), which create trust with the user in face-to-face contactto support the use of the digital solution.Products that empower users to make conscious choicesMany of the financial problems faced by the population are caused by lack of understanding of services and unclear information that leads to not informed/healthychoices. The fourth opportunity proposes the use of selection architecture (nudgesof behavioral economics) to support the good use of more informed services anddecisions, improving aspects of savings, planning, credit taking, and so on.Source: Social Services Financial Impact Thesis, sectoral mapping coordinated by Artemisia, with supportfrom the Aspen Network for Development Entrepreneurs ) Catalyst Fund, sponsored by the MetLife Foundationand technical consultancy by the CDE Plan.19

Impact put into practiceThe financial return on an investment is easily measured from a number of existingindicators common to other assets to make them easily comparable.On the impact side, the Impact Management Project (IMP) [1] emerges as an important initiative to seek similar consensus on the different impact aspects generated byan organization.Recognizing the multiple dimensions of the impact experienced by people and theplanet is the basis for understanding the changes caused by products and services.In addition, with the establishment of common impact objectives, funds and companies can align interests to achieve impact results.In this sense, IMP proposes a global consensus that any type of impact experiencedby people or the planet – intended and unintended, positive and negative – needsto be understood across five dimensions:WHATWhat outcome(s) do business activities drive?How important are these outcomes to the people (orplanet) experiencing them?WHOWho experiences the outcome? How underserved arethe stakeholders in relation to the outcome?HOW MUCHHow much of the outcome occurs across scale, depth,and duration?CONTRIBUTIONWhat is the enterprise’s contribution to what wouldlikely happen anyway?RISK:What is the risk to people and planet that impact does notoccur as expected?20

These dimensions bring to the table a broader perception of the impact and, fromthat, how we can best define the expected outcomes and manage processes in pursuit of objectives.The impact management process requires some mutually influencing steps:– To understand the intentions and restrictions;– To design a deliverable model (or a portfolio of deliverable models) that generateseffects on people and/or on planet by means of products and services, throughdistribution, operation, governance and/or the supply chain;– To define impact objectives;– To define the financial objectives;– To collect, analyze and evaluate information on the effects experienced by peopleand/or the planet.In the measurement layer of impact objectives, there are a few paths being drawn.An approach that has received increasing attention, according to Insper (InsperInstitute of Education and Research) is grounded on indicators of high relevance tothe impact project and with additionality verification, i.e., not just analysis of theproject outcome itself, but also what would have happened to the target populationwithout the investment.This model is based on two pillars:– Indicators that are highly relevant for measure the project impact;– Comparison with similar control groups were not contemplated by the investment.Note 1: Impact Management Project (IMP) is a globalinitiative involving more than 3,000 practitioners,including entrepreneurs, fund managers, investors,resource allocators and intermediaries. The goal ofthis initiative is to build consensus on how we speak,measure and manage impact.21

Given this context, there are some initiatives that developed objectives or indicatorsthat have become increasingly widespread and helped to link investment theses to aglobally relevant social and environmental agenda.SDG - Sustainable Development Goals ONUIn September 2015, 193 global leaders committed to 17 goals for reducing poverty andinequality in the world, on an agenda that aims to address, on a global scale, issues such ashunger, access to education, gender equality and basic sanitation, among others, by 2030.These goals, being global, suggest that companies or initiatives can rely on them (in justone or more) as a goal to have a positive impact on society.Approaches like SDG also support investment criteria and the creation of these goals thatcan be pursued by any company.Source: [https://www.globalgoals.org/]ESG CriteriaThe ESG criteria aims to support the investment analysis and measure untangibleissues as a driver that can add or destroy value in an investment thesis.The potential impact of these issues on companie’s performance has been studiedby different players such as corporate, activists and regulators, e.g.Sample of ESG Issues:ENVIRONMENTALSOCIALGOVERNANCE- Climate change- Customer satisfaction- Composition of the board- Air and water pollution- Data protection and privacy- Audit Committee structure- Biodiversity- Gender and diversity issues- Deforesting- Employee engagement- Corruption and moneylaundering- Energetic efficiency- Relations with communities- Waste Management- Human rights- Labor rights- Executive compensation- Lobby- Political contributions- Investigation of complaintsSource: ESG Guide, from ABVCAPIn addition, it is already possible to design market instruments that multiply provensuccessful initiatives. One example are the so-called Social Impact Bond and Development Impact Bonds, which raise funds from investors to sponsor projects with socialimpact. Based on impact metrics, targets are set that, when achieved, generate a rewardor bonus for investors. Therefore, we are not only finding tools to measure the impactgenerated by the investment, but also creating the incentive for its continuity.Exit AlternativesThe divestment stage is a common challenge for private equity and venture capital investments and in the case of impact investments, another layer is added to address thecompany’s social and environmental impact objectives so that they are in line with theobjectives of the project buyer. Usually the most common way out in the asset class isby selling a stake to a strategic partner.22

GPProfileJESSICA SILVA RIOSVox CapitalVox Capital is a pioneer investment management firm that offers attractive financial solutions through the integration ofrisk, return and social/environmental impact in its decision-making process. Vox Capital purpose is to develop financially attractive solutions that improve the human experiencewhile nurturing the planet.In order to do that, Vox identified three major problems of thelow-income population in Brazil that translates into investmentopportunities to cause positive impact and achieve competitive financial returns. Today, its investments centers around thehealth, education, and financial services sectors.Give us an overview of VOX performance.Vox was founded in 2009 and our first fundwas launched in 2012 - Vox Impact InvestingI. With R 84 million under management, thefund was invested in 10 convertible notesand 10 equity deals. We are now in a stage ofportfolio development and divestment.In June 2018, we had the first major resultof our operation in this fund: the sale ofalmost 30% of equity stake we held inTem Saúde, a prepaid card company forhealth services, in a strategic move thatenabled a joint venture with Generali,an European

According to GIIN (Global Impact Investing Network) Investors Forum report, the investing market of global impact reached US 502 billion of assets under management in 2018. And part of the composition of this number is for venture capital and private equity funds, which is gradually increasing its participation in the impact investing segment.