Turning $1 into $5: How Building “Equity” Unlocks Long-Term Impact

“It feels like a scourge from God,” said 58-year-old coffee farmer Nicholas Pineda as we inspected rows of diseased coffee bushes on his farm in remote Santa Barbara, Honduras. Like thousands of other coffee farms across Latin America, Nicolas’ 18-year-old farm was hit with “coffee leaf rust,” a fungus that, over the last several years, has reduced large swaths of verdant coffee country to fields of spindly, leafless plants and has caused more than $1 billion in economic damages.

Nicholas Peneda

Honduran coffee farmer Nicolas Pineda holding a coffee leaf affected by coffee leaf rust.

Root Capital has been well positioned to respond to the crisis, and we’ve done so by mobilizing capital from the public and private sectors to launch the Coffee Farmer Resilience Initiative (CFRI).  Among other things, the CFRI has enabled us to make loans to help farmers like Nicholas replace rust-affected coffee trees.

Anticipating an uptick in risk as we helped coffee businesses and farmers navigate the immediate crisis and take a long-term view, we focused our attention on raising additional “equity” – not equity in the traditional sense, but rather a reserve of philanthropic dollars dedicated to absorbing portfolio losses and protecting Root Capital’s debt investors. (The Global Impact Investing Network refers to this kind of capital as “catalytic first loss capital.” They’ve written extensively on the topic here).

When $1 equals $5

At the heart of Root Capital’s business model is an intertwining of two distinct flavors of capital – philanthropic “equity” from donors and debt capital from investors – that combine to unlock five times as much impact as we could have otherwise. Put simply, for every dollar we raise in “equity” we can expand our balance sheet and raise five dollars in debt (this is in fact a covenant in our loan agreements with investors), meaning we can mobilize 500% more money for smallholder farmers than if we were to rely on donations alone.

In the context of the coffee leaf rust crisis, each dollar of new “equity” we have raised has allowed us to deploy five dollars in the form of long-term, five- to seven-year loans that are helping farmers replace aging, rust-affected trees in a process known as farm renovation. To date, 844 farmers in three countries have been able to renovate their farms thanks to these high-impact “equity” dollars. That’s 844 farm families that get to stay on their land and aren’t forced to migrate; 844 farmers who will stay in coffee and not be forced to cultivate illicit drugs. That’s 3,800 acres that will remain under sustainable cultivation and thousands of children who will have better access to health care, nutritious food, and education.

That’s what “equity” unlocks.

Catalyzing Mainstream Capital

Judith Rodin, president of the Rockefeller Foundation, once said:  “Philanthropy must do what it does best: peel back the first layer of risk, and experiment where other sectors cannot, making development and commercial investment dollars more productive and less risky.”

This is the role that philanthropic “equity” plays at Root Capital. Root Capital maintains a 97 percent repayment rate from our clients — and a 100 percent repayment rate to our investors. A relatively small base of philanthropic equity has helped reduce the risk of losses to investors and helped us attract over $100 million in capital to support our global lending.

“Root Capital is set up in such a way that everyone – from small businesses like Dean’s Beans to the consumers who drink our fair trade organic coffee – has the opportunity to achieve out-sized impact by making philanthropic ‘equity’ investments,” said Dean Cycon, founder and CEO of Dean’s Beans Organic Coffee and a Root Capital “equity” investor. “I love the way Root Capital leverages my gift. Each dollar of philanthropic ‘equity’ allows them to lend five additional dollars to improve the lives of hardworking farm families around the world. You can’t beat those odds!”

An “equity” investment in Root Capital is a long-term investment for farm families around the globe. Every dollar you give will be multiplied by five. Help us accelerate our impact by making a contribution today.

Topics: Our Community | Stories of Impact |

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