Impact Investing as a Strategy for Economic Development

One of Puerto Rico’s greatest challenges is acquiring financing for small and medium businesses (SMEs) to scale their operations or continue operating after overcoming a major hurdle –such as a hurricane or a pandemic– and for start-ups.

Of course, there are many organizations whose mission is to train local entrepreneurs and put them in contact with potential investors to help them take their businesses to the next level. Nevertheless, all the benefits additional business knowledge may provide considered, this could be an additional step in a race against time.

Acrecent, a Puerto Rican alternative financing company in the business of providing financing to SMEs, recently secured $34.8 million in investments from international firms such as BlueEarth Capital, Ceniarth, Calvert Impact Capital and Community Development Venture Capital Alliance, (CDVCA). All of these firms are characterized by investing capital and experience in countries with social and economic challenges, generating an impact not only measurable, but also with sustainable financial returns.

If you haven’t heard of Acrecent before, you’re not alone.

“The reality is that Acrecent is representative of a sector that is grossly underdeveloped in Puerto Rico. It’s an Achilles heel on the island— it’s one of a very few alternatives that businesses have,” said James Connor, CEO of Acrecent.

While previously working for GE Capital running their operations in the Caribbean, Connor noticed that there were no local, credible non-bank options for businesses on the island. As the market started to contract, Connor sensed that GE Capital would exit the market, which it did, leaving behind a $1.2 billion gap in non-bank lending.

Like other small businesses that struggle to fundraise, Acrecent has also struggled with this. Because of the narrative surrounding the island’s economy and future, it can be difficult to get institutional capital channeled towards Puerto Rico. “Puerto Rico –in the context of the States and territories– is not small,” clarified Connor. “It needs a robust non-bank capital sector to be developed.”

Acrecent manages about $160 million on the island, which is quite fractional when taking into account Puerto Rico’s over $100 billion economy. Acrecent Financial Corporation was founded in 2004, and —despite a global financial crisis, the island’s protracted economic recession, hurricanes Irma and Maria in 2017, Puerto Rico’s bankruptcy and debt-restructuring, and now Fiona in 2022– they continue to support the essential small businesses that provide much-needed services to the island’s population.

“We started as a direct lender. As we transformed the company into a fund management entity, still serving the same need – of the overlooked small and medium-sized enterprises (SMEs)– the way we raise money is different than we used to,” Connor told THE WEEKLY JOURNAL. “Unbeknown to us, we’ve been in the impact investor sector ever since starting the company.”

Impact investing responsibly produces a multiplier effect that allows capital to be reinvested sustainably and with value for communities in need. According to Calvert’s Impact Report for 2022, the sustainable investment universe in the US has grown from approximately $639 billion in 1995 to more than $17 trillion domestically and $35 trillion globally.

For Acrecent, healthcare is a key industry. “Healthcare is a huge one for us. [Puerto Rico] doesn’t get automatic funding for Medicare – that’s a risk factor in the eyes of investors. The traditional sources of capital and credit are not comfortable providing finance for the acquisition of technology [for hospitals]. We are a relevant player in that. We make sure hospitals have access to the latest tech needed for the community,” said Connor.

The company completed its largest loan ever three years ago. They received a call from a hospital operator that wanted to buy out the hospital serving the greater Bayamon area. With a $35 million loan, Acrecent was able to ensure that the Bayamon Medical Center could continue serving an area of 1 million people, save jobs, and make much-needed improvements to the hospital.

Through 19 tough years for Puerto Rico, Acrecent’s realized losses from borrowers are less than 50 basis points total. “We are industry agnostic. We’re always looking at the needs of the market, helping underused or abandoned properties, providing financing so these buildings get repurposed. There is a lot of need and opportunity in this sector,” Connor described.

Acrecent has had three funds since they began raising impact funds in late 2018. As of last October, they had completed 293 financings over the past three years. As of this month, they’ve raised $65 million dollars and deployed $85 million dollars. Some 170 business have received financing from those impact funds

“The common denominator in places like Puerto Rico, is that there are very few credit options,” Connor said of the island. “However, the theme of the impact investment sector – while we all recognize there are more risks — is that you need to recognize you have to take more risks, or else you don’t have the impact that the community needs to have.”

“To my understanding, they’re the only institutional impact investors active in Puerto Rico,” Connor said of the institutions that they secured investment from (BlueEarth Capital, Ceniarth, Calvert Impact Capital and Community Development Venture Capital Alliance, (CDVCA)).

Connor hopes this will lead other institutional investors to do the same, taking the island from a philanthropy target to a point of investment, access, and economic opportunity.

“Not one of these institutions five years ago would have ever considered Puerto Rico as a place where they could make a difference. The fact they are now comfortable is enormous,” he continued.

SMEs have the ability to bring socio-economic wealth out of a few hands, filling gaps in the market. But when they can’t get the capital they need, the wealth stays concentrated in a few hands.

“After 15 or so years of severe contraction, there is now a great community of entrepreneurs and startups that are in a great place to do well and make money,” Connor encouraged. “There is a huge need and therefore a huge opportunity. Our investors have done really well, because our customers have done really well.”