Even before the hurricane that devastated Puerto Rico last September, it was one of the poorest parts of the United States, suffering from a decade-long recession and resulting debt crisis. The island’s median income is half that of Mississippi, the poorest state, and its unemployment rate is more than twice as high.
Nonetheless, the Community Development Venture Capital Alliance saw an opportunity there, says Kerwin Tesdell, president of the New York-based nonprofit venture-capital network. “There were a lot of new funds forming and entrepreneurial activity," Tesdell says.
Launched 23 years ago, before the term “impact investing” existed, CDVCA injects funds from investors such as the Ford Foundation and Goldman Sachs into low-income communities to create good jobs and boost entrepreneurial capacity while seeking market-rate returns for its investors. The organization currently manages $183 million in investment capital. Traditionally, it has focused on the 50 states, but a year ago, it branched out to Puerto Rico with the launch of its $45 million Puerto Rico Fund for Growth.
Cultural shifts in Puerto Rico made it ripe for investment. The older generation of educated Puerto Ricans tended to work for others, in established businesses like government and the pharmaceutical industry, opportunities that shrank after the financial crisis. “Younger Puerto Ricans are more entrepreneurial and are more willing to take risks,” Tesdell notes. “There are a number of young people forming funds who have strong investment backgrounds that they gained on the mainland and came back to invest in Puerto Rico.” Puerto Rico also has several active business incubators, including Parallel18 and Grupo Guayacán.
The Puerto Rico Fund for Growth is currently all Puerto Rican money, and its lead investors are large insurance funds, including disability and car insurance funds. The fund’s primary objective is to invest in funds that in turn invest in businesses that operate or provide employment in Puerto Rico. “We’re helping to build out the entrepreneurial finance ecosystem in Puerto Rico,” Tesdell says. “We’re looking for very highly skilled fund managers that are going to make money in Puerto Rico and know the Puerto Rican economy.”
One fund manager who fit the profile is MIT-educated Alexander Borschow, a Puerto Rico native who returned to the island after 14 years in the U.S. Informed by stints marketing equity derivatives at BNP Paribas and serving as finance director of the Italian marketplace Eataly, Borschow launched an agribusiness fund called Semillero Ventures in 2016. The Puerto Rico Fund for Growth invested $4 million in Semillero, which focuses on sustainable food and agriculture businesses, in hopes of helping reduce the island’s heavy dependency on imports. Even before the hurricane, 85% of Puerto Rico’s food and beverages were imported.
“Our goal is substituting imports by increasing local production and thereby creating greater food security and self-sustainability,” says Borschow, managing director of the $15.3 million fund. “This will create jobs, support ambitious entrepreneurs, and increase economic value created and captured in Puerto Rico. CDVCA’s commitment will allow us to pursue additional investment opportunities and increase our impact.”
Still, delivering market-rate returns in the hurricane-ravaged U.S. territory will be an uphill battle, according to Mark Zandi, chief economist at Moody’s Analytics. “Puerto Rico’s struggling economy is a clear headwind to returns on an investment on the island,” Zandi says. “But there may be many good investment opportunities given the lack of investment capital coming to the island. Regardless, the alliance deserves credit for venturing where few others have to help jump-start the island’s economy.”
After the hurricane, CDVCA realized that Puerto Rico businesses needed higher-risk, lower-return investments to help them with urgent needs like replacing their roofs and meeting payroll. In collaboration with Puerto Rico finance professionals, the organization is raising grants for its new Better Than Before Fund to provide businesses with loans and investments. Those that CDVCA recoups will go into an evergreen fund to help Puerto Rico businesses in the future.
The Puerto Rico Fund has also earmarked up to 15% of its capital for direct investments in businesses. One of these, New Energy Corp., installs solar panels on homes and businesses, giving them a more-reliable alternative to the electric utility at a time that some 150,000 buildings on the island still lack power. CDVCA’s $5 million loan will help the 11-year-old company get a new office and warehouse, hire more installers and engineers, and buy in bulk at better prices.
“New Energy has not been able to maintain its aggressive growth due to lack of external capital, and we have self-funded the growth, having a big impact on our cash flow and our ability to go after deals or more volume,” says the company’s president, Alejandro Uriarte. “This loan will jump-start our growth and allow us to create the supporting structure needed to get as much market share as possible in Puerto Rico.”
