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Colección: INTERAMER
Número: 69
Año: 2000
Autor: Ramón López and Juan Carlos Jordán, Editors
Título: Sustainable Development in Latin America: Financing and Policies Working in Synergy

ANNEX 2

TERRA CAPITAL FUND:
AN EXAMPLE OF PRIVATE-SECTOR BIODIVERSITY FINANCING

2 This material is presented for informational purposes only. It does not constitute an offer to sell securities or an invitation to participate in the Fund.

1. Background

Latin America is the source of a wide variety of underutilized plant and animal species and agricultural by-products. It also contains some of the world’s most fragile and remote environments. Together, these provide an opportunity to protect these environments while producing high-value products that can support economic development, thereby ensuring a mutually beneficial link between growth and conservation. A market-based approach to biodiversity conservation makes sense, because biodiversity-linked businesses have a market with tremendous growth prospects.

However, private-sector biodiversity projects face a scarcity of financing sources. To date, financial support for biodiversity-linked projects has come mainly in the form of subsidies such as grants or low-interest loans from foundations and multilateral and bilateral agencies.

The Terra Capital Fund will respond to the growing need for equity financing in biodiversity-linked sectors, a niche underserved by the few equity capital investment funds already established in the region.2

The Fund is premised on the expectation that increased environmental awareness among consumers is creating a strong and growing demand for environmentally sustainable practices and products. Businesses are discovering attractive growth opportunities in biodiversity-linked industries and believe that they can derive benefits —including long-term cost savings, more efficient environmental risk management, and access to growing niche markets— from adopting new, environmentally friendly processes. While the volume of biodiversity products is still small relative to the overall size of the pertinent market, the production of these products is increasing rapidly.

2. Objective

The objective of the Fund is to provide risk capital to small enterprises focusing on sectors in which sustainable practices can result in positive linkages to biodiversity. Because most biodiversity-based businesses are small to medium-sized, there is an attractive investment opportunity in this sector. The long-term financial support will help small enterprises introduce sustainable practices on a broad enough scale to ensure significant biodiversity benefits. The Fund will use a private equity investment approach based on the concept of building a high-risk/ high-reward portfolio, where the target sectors comprise a niche of investment opportunities currently underserved by the capital market. By becoming an early player in financing new business, the Fund is expected to capitalize on some of the most profitable investment opportunities and at the same time to serve as an engine of sustainable development.

3. Fund Sponsors and Partners

The development of the Fund is sponsored by a Brazilian investment bank, a private Brazilian company, a non-profit U.S.-based development organization, and the Multilateral Investment Fund (MIF) of the Inter-American Development Bank. The International Finance Corporation (IFC) is a shareholder in the management company of the Fund.

The Fund will work with many private-sector counterparts. Investments are expected to be referred from traditional commercial banks, law firms, and accounting firms. Involving the local private sector is an important form of leveraging that provides benefits to both the Fund and local financing participants. The Fund’s sponsors benefit also from relationships with several dozen NGOs devoted to conservation, foundations, and other development agencies and are actively expanding this network.

The Fund will be supported by the GEF through a grant of US$5 million, to be disbursed over the life of the Fund. The GEF grant funds will be used to help the manager pay the Fund’s “incremental costs” due to the environmental objectives over and above the typical fund advisory costs covered by the management fee. The costs of a special Biodiversity Advisory Board of the Fund will also be covered in part by the GEF grant.

4. Investment Criteria

Areas of Investment. The Fund will focus on the following sectors:
  • Sustainable agriculture and aquaculture
  • Sustainable forestry (timber products)
  • Non-timber forest products
  • Nature-based tourism
  • Other industries with biodiversity linkages
Stage and Size of Investments. The Fund will invest in mostly small to medium-sized companies in both the start-up and the expansion phase. The proceeds are expected to be used for restructuring, modernization, expansion, acquisitions, the development of new products, and similar activities. The investments must comply with environmental criteria established by, among others, its Biodiversity Advisory Board. The Fund will make minority investments ranging from the equivalent of US$500,000 to a maximum of 15% of the Fund’s total committed capital.