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Root Capital


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  • 1. 2009 — 2013 Private Offering Memorandum $63,000,000 150 Units Philanthropic Equity 80 Units Debt The purpose of this Offering is to scale Root Capital’s impact on global poverty, allowing us to increase prosperity for one million farm households in developing countries by linking rural small and growing businesses with capital markets. From 2009 – 2013, we aim to: • Triple our loan portfolio such that in 2013, we will lend $121 million to more than 350 grassroots businesses representing one million small-scale producers. • Expand our financial education and training program so that 200 more rural enterprises have the capacity to grow their operations and access capital from local financial institutions. • Link rural small and growing businesses with local banks and microfinance institutions, thereby unlocking significant amounts of capital to fuel the growth of these grassroots enterprises. Between 2009 and 2013, we will build a sustainable social enterprise capable of delivering on our mission in perpetuity. To scale our operations and achieve 100% self-sufficiency in our lending program, we require $40 million in additional debt capital and $15 million in Philanthropic Equity. The Philanthropic Equity will be tracked using the SEGUESM accounting method. Growth Capital # of Units Unit Price Proceeds to Root Capital Senior Debt* 68 $500,000 $34,000,000 Subordinated Debt* 12 $500,000 $6,000,000 Philanthropic Equity 150 $100,000 $15,000,000 2009 — 2013 Units of debt will provide a range of terms and rates. *The terms of the note offering are not described here but can be found in the Note Offering Private Offering Memorandum Disclosure Statement and the related form of promissory note and loan agreement. Units of Philanthropic Equity represent a perpetual interest in the economic and social benefits of Root Capital’s work. That interest is strictly philanthropic, with no provision for cash returns at any time. 1. Expenses associated with this Offering were funded by generous support from the Rockefeller Foundation. Proceeds will not be used for Offering expenses. 2. In the event of over-subscription, Root Capital may, at its discretion, increase the offering of units of debt and Philanthropic Equity by up to 20%. During the growth period, we will also raise $8 million in Ongoing Philanthropy. This supports Root Capital’s ongoing revenue model and is therefore distinct from one-time Philanthropic Equity and is not included in the Growth Capital requirements. # of Units Unit Price Proceeds to Root Capital Ongoing Philanthropy -- -- $8,000,000 The financial guidelines and reporting obligations described in this memorandum comply fully with Nonprofit Finance Fund’s Sustainable Enhancement Grant (SEGUESM) methodology. March 26, 2009
  • 2. Art Atlas Savannah Fruits Company Viñas Chequen Handcrafts Shea Butter Wine Peru Ghana Chile Borrower since 2005 Borrower since 2007 Borrower since 2007 Investing at the root of grassroots businesses. Investing with Root Capital Root Capital is a nonprofit social investment fund that is pioneering finance for grassroots businesses in rural areas of developing countries. We provide capital, financial education, Kavokiva Cosatín Nuts of Africa Cocoa Honey and Coffee Cashews and market connections to small and growing businesses that Ivory Coast Nicaragua Kenya Borrower since 2007 Borrower since 2002 Borrower since 2007 build sustainable livelihoods and transform rural communities in poor, environmentally vulnerable places. Investing at the root of rural communities. Since our launch, we have provided more than $120 million in credit to 235 grassroots enterprises in 30 countries, maintaining a 99% repayment rate from our borrowers and a 100% repayment rate to our investors. Organic Blooming La Voz Tecnoají Flowers Coffee Chili Peppers Ecuador Guatemala Colombia Borrower since 2008 Borrower since 2001 Borrower since 2008 Investing at the root of the environment that sustains us all. Root (n) 1. the underground portion of a plant that draws food and water from soil 2. one’s ancestry, culture or locale 3. a base or support 4. an essential part or element
  • 3. Meet One of Our Borrowers Contents Gumutindo Coffee Cooperative I. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Mt. Elgon, Eastern Uganda II. Obstacles to Growth for Grassroots Businesses . . . . . . . . . . . . . . . . . . . . . . 7 Founded in: 1998 III. Root Capital’s Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Root Capital borrower since: 2005 IV. Growth Plan: Four Key Initiatives for Sustainable Impact . . . . . . . . . . . . . 14 V. Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Gumutindo, which translates to “excellent coffee” in the local Lugisu language, is a second-level Ugandan coffee cooperative representing six VI. Social and Environmental Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 smaller primary societies and 6,000 farmers. The only coffee cooperative VII. Five-Year Financial Operating Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 in Uganda that is both Fair Trade- and organic-certified, Gumutindo has VIII. Comprehensive Funding Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 created opportunities for its members to access premium prices that have IX. 2009 – 2013: Philanthropic Equity Offering Terms and Conditions . . . 30 helped sustain incomes during downturns in the global coffee market. In addition to marketing its members’ product, Gumutindo trains farmers in organic production practices. Appendices Since becoming a Root Capital borrower, Gumutindo has received a total of $1.5 million in loans, growing its revenues by nearly 200%, and increasing the annual amount it has paid to its farmer members by 170%. A. Awards and Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Meet Two of Gumutindo's Members B. Press . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 C. Executive Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Jane Khainza (above left) is a member of Gumutindo’s Peace Kawomera D. Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Cooperative. She tends to the family’s coffee trees while her husband E. Organizational Structure – 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 serves as Peace Kawomera’s treasurer. They now own additional land and support 13 children with their coffee income. F. Pro Forma Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 G. Our Colleagues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Recently elected Chairman of Gumutindo's Nasufwa Coffee Association, Robert Gonyi (left) has more than doubled his coffee yield since joining the cooperative. He has invested some of his coffee earnings in a small shop that sells basic food items and supplies. He has also reinvested a portion of his coffee profits to purchase an additional plot of land and expand his coffee production.
  • 4. 2002 – 2008 Root Capital Metrics I. Executive Summary Number of Grassroots Businesses Financed Number of Producers Benefited Access to capital and markets increases prosperity by enabling businesses to grow, communities to thrive, and economies to 160 280,000 flourish. Across the developing world, the absence of capital and the isolation from viable markets exclude the rural poor— approximately 75% of the 2.6 billion people living on less than $2 a day—from the formal economy. As a result, they make 120 210,000 a subsistence living that exposes them to drought and disease, strains the natural environment, and limits opportunities for 80 long-term economic development. 140,000 60 Since Root Capital’s founding in 1999, our mission has been to pioneer finance 70,000 40 for grassroots businesses that build sustainable livelihoods and transform rural communities in poor, environmentally vulnerable places. Trapped in the “missing 0 0 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 middle,” or the gap between microfinance and corporate banking, businesses such as farmer and artisan cooperatives in Latin America and Africa lack access to capital to expand their operations and generate economic opportunities for marginalized populations. Root Capital bridges this gap by providing capital, delivering financial Acres Under Sustainable Production Borrower Enterprise Revenue (000s) (000s) education, and strengthening market connections so that rural small and growing 800 $360,000 businesses (SGBs) can lift entire communities out of poverty and strengthen the 600 $270,000 health of our planet. 400 $180,000 Through innovative approaches to development finance, Root Capital reaches remote populations that traditional banks have long overlooked. We provide 200 $90,000 loans ranging from $25,000 to $1,000,000 to rural enterprises and agricultural entrepreneurs that link small-scale farmers and artisans to competitive markets. 0 $0 As of year-end 2008, we had disbursed a total of $120 million to 235 grassroots 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 businesses in 30 developing countries while maintaining a 99% repayment rate from our borrowers. Beyond our direct impact on hundreds of businesses and hundreds of thousands of rural producers and their families, our long-term objective is to demonstrate viable models and Average Lending Capital vs. Disbursements Net Earned Revenue vs. Lending Operating Expense attract commercial financial institutions so that they extend financial services to rural populations on a much larger scale. (000s) (000s) $44,000 $3,000 As we have grown our loan portfolio, we have found that for many of the businesses we finance, access to capital is not enough. $33,000 $2,250 They must also develop the managerial capacity to use it efficiently. To address the corresponding need for accounting and appropriate financial systems, we launched a financial education program in 2006. This program is designed to train leaders $22,000 $1,500 of rural businesses in basic bookkeeping and financial management and to help them attract capital from commercial banks and other financial services providers. To date, we have trained leaders from 55 farmer and artisan associations in Mexico $11,000 $750 and Central America and have begun to offer training to rural SGBs in Africa. $- $- 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 Building on this record, Root Capital now seeks to scale our impact both by directly financing and training a much larger number of grassroots businesses and by accelerating the adoption of our lending model by local financial institutions. In 2013, Average lending capital Earned revenue from lending and investment activities we plan to serve more than 350 grassroots enterprises representing one million farmers, artisans, and other small-scale rural Total amount disbursed Lending operating expenses producers. Our goal is to triple our disbursements from $41 million in 2008 to $121 million in 2013. At the same time, we will build the financial acumen of managers and members of 140 grassroots businesses. By demonstrating the “bankability” of these enterprises, Root Capital will catalyze investment by commercial lenders in these underserved markets. 4 5
  • 5. To achieve this impact, Root Capital seeks to raise $55 million in Growth Capital by 2013, comprised of $15 million in Philanthropic Equity and $40 million in low-interest debt. This Growth Capital will: II. Obstacles to Growth for Grassroots Businesses • Enable us to achieve financial sustainability in our lending operations by 2013. Throughout the developing world, small-scale farmers and artisans are marginalized from the formal economy and relegated • Provide the necessary lending capital to triple our loan portfolio from 2008 to 2013. to a subsistence living that stresses the natural environment and offers few opportunities for long-term prosperity. Small and • Fund a portion of our financial education and field-building activities through 2013. growing businesses, such as farmer and artisan associations, have the potential to increase household incomes so that the rural poor can build sustainable livelihoods. Yet these businesses often lack the necessary tools for success—capital, We will also raise $8 million in Ongoing Philanthropy that represents a reliable stream of revenue to fund our operating management capacity, market access, and an enabling operating environment. platform and the balance of our financial education and field-building activities. An investment in Root Capital will unlock access to financial services and create a path from subsistence living to sustainable Lack of Capital livelihoods for millions around the world. Access to capital is critical for grassroots businesses such as farmer cooperatives where there is a lag between planting a crop, harvesting and processing it, and receiving payment from buyers. When a rural SGB, such as a coffee or cocoa cooperative, cannot pay its farmers when they deliver product during the harvest, the farmers often sell to local middlemen for cash upfront at a price that is a fraction of their product’s value. To avoid this scenario, grassroots businesses seek short-term The Role of Small and Growing Businesses working capital loans to cover the period of time between when they purchase product from their farmers and when they get in Rural Communities paid months later by their buyers. However, rural businesses that require $25,000 to $1 million to purchase product from their members or invest in processing Root Capital supports small and growing businesses (SGBs)—private machinery are typically considered too large to be served by microfinance institutions and too small, too risky, and too remote enterprises and worker-owned cooperatives and associations—that are to secure financing from conventional banks. Figure 1 highlights a dual vacuum in the capital markets: 1) location – the rural based in rural areas and have socially responsible and environmentally finance gap and 2) capital need – the “missing middle” between microfinance and corporate banking. sustainable practices. SGBs represent the smaller end of small- and medium-sized enterprises (SMEs) and are characterized by their high growth potential. Figure 1. "Missing Middle" and Rural Finance Gap Capital Examples of SGBs include: Need • A cooperative of 4,200 small-scale coffee farmers in Rwanda. • A private business in Ecuador that purchases fresh mangos, bananas, and oranges from small-scale farmers and processes them for export as dried fruit. • An association of 780 sesame farmers in Bolivia. • A private company in Zambia that purchases honey from 5,000 traditional beekeepers. Venture Capital Private Equity Banks Rural SGBs build sustainable landscapes and livelihoods in the following ways: • Economic benefits. Rural SGBs link remote producers to markets that increase their incomes by consistently paying $1MM prices for their products that are well above those of local intermediaries. Grassroots businesses also generate rural employment, including managers, accountants, agricultural extension staff, drivers, and workers at processing plants. • Natural resource management. Rural SGBs provide training in sustainable production to avoid deforestation, increase Missing Middle re-forestation, reduce chemical use, improve water and soil management, and enhance the health of watersheds and the people and animal species that depend upon them. • Community development. Rural SGBs channel price premiums and grant funding into local communities to support $10K Rural Finance education, health, and cultural activities. Gap • Social empowerment. Farmer and artisan associations offer members opportunities for participatory decision-making Microfinance and are a source of community ownership and pride. They also stem migration to urban areas by offering producers Institutions opportunities to support their families through traditional agricultural and artisanal activities. $0K Location Urban Rural 6 7
  • 6. At the lower end of the market, microfinance institutions employment, and improved natural resource management for have historically managed the high costs of servicing small greater long-term sustainability and economic opportunity. “Access to credit through Root loan amounts by focusing on entrepreneurs in urban or Capital has helped us in many ways. densely populated rural areas. Likewise, commercial banks Difficult Operating and With your support we’ve been able in developing countries have traditionally overlooked rural Policy Environment markets for reasons including: to provide more prompt payment to members. Now members can meet Rural SGBs often face unaccommodating operating and policy • Perceptions among urban bankers that there are few environments. Most developing countries have yet to establish the needs of their families for food viable businesses to finance and that the agricultural an enabling environment that addresses the specific needs and education, and improve their sector is inherently high-risk and low-return. • Cultural biases held by middle-class urbanites against of rural SGBs in their banking systems, legal and regulatory lands as well.” frameworks, and public institutions (e.g., few countries have rural producers. • Physical challenges to reaching remote areas. an equivalent to the U.S. Small Business Administration). Erick Geovani Velásquez • Lack of experience in export and trade finance within While there are numerous examples of thriving grassroots Coffee farmer, member, and bookkeeper certain local and state-owned banks, and within Asociaciόn Unidos para Vivir Mejor businesses in these countries, their growth is stifled by a lack certain industries (particularly markets for specialty (ASUVIM), Guatemala of support in navigating challenging conditions and applying products). best business practices. • Regulatory issues relating to the mandatory risk classification of agricultural lending (e.g., reserve requirements). • Political uncertainty related to recovering agricultural loans in periods of crisis. • External risks, including price and weather risk. • Familiarity with attractive alternative sectors, primarily consumer loans and business loans to urban enterprises. Banks that are willing to lend in rural areas typically require hard collateral in the form of deeds to land and buildings and coverage ratios of two to three times loan value. These practices exclude all but the most formal, best capitalized (i.e., largest), and often most politically connected companies. Limited Financial Management Capacity Managers and leaders of rural SGBs frequently lack expertise in bookkeeping and basic financial management. They often need some level of assistance in implementing standard financial statements, objective accounting systems, written financial policies and capitalization strategies, and interrelated plans of production, collection, and sales. Without these skills, rural businesses struggle to manage their operations efficiently, are unable to build reliable track records, and are therefore deemed high credit risks by local banks. Poor Market Access Disaggregated producers in remote areas typically lack 1) information about market movements to know when to sell their products, 2) direct access to these markets so that they can respond to advantageous conditions, and 3) sufficient volumes to negotiate favorable terms. By organizing themselves into cooperatives and associations, or by supplying private enterprises that aggregate hundreds of other suppliers, small-scale producers can overcome all three limitations at once. In many cases, these rural SGBs are able to sell high-quality products to export markets that pay premium prices. Tighter integration of rural producers into global value chains can lead to higher incomes, increases in rural 8 9
  • 7. III. Root Capital’s Model Root Capital increases prosperity for the rural poor by pioneering finance for “unbankable” small and growing businesses Strategy 1: Finance in remote communities of Latin America and Africa. By leveraging market demand for sustainable products from developing countries, Root Capital addresses the interrelated problems of rural poverty and environmental degradation. Employing a Root Capital provides loans ranging from $25,000 to $1,000,000 to private enterprises and to businesses comprised of small- technique frequently referred to as value chain finance, Root Capital provides credit to rural SGBs that is secured against scale producers organized into associations. Annual interest rates, which typically range from 10% to 12% in U.S. dollars, are assignment of payment for their future sales to buyers in North America and Europe. With demand for agricultural products designed to be competitive with local bank rates. That is, we aim to extend finance to businesses not currently reached by projected to increase by at least 50% over the next two decades and similar growth in markets for natural products, Root commercial lenders without distorting the market through interest subsidies. We offer: Capital sees tremendous economic opportunity in strengthening the link between rural producers and global markets. • Short-term trade credit loans with terms of up to one year that are generally oriented around a harvest or production Our long-term objective is to attract local financial institutions into underserved markets so that they respond to the capital cycle. These loans are typically used by borrowers to cover costs during the months between purchasing raw product from their farmer and artisan suppliers and receiving payment from their buyers. needs of rural SGBs on a large scale. With access to capital and expertise in how to manage it, grassroots businesses can • Long-term fixed-asset loans with terms of up to five years for investment in processing equipment, infrastructure, and strengthen their operations, increase revenues, and generate significant economic, social, and environmental benefits that general operations. improve the livelihoods of rural producers and the sustainability of their communities. The majority of our loans employ a form of value chain finance, Root Capital is uniquely positioned to meet the needs of rural SGBs and achieve our desired impact for the following reasons: depicted in Figure 3, whereby the main security is future sales contracts from buyers, primarily in North America and Europe. 1. Order goods • Our streamlined loan evaluation system enables us to approve and disburse a loan within weeks of receiving an application. Grassroots Buyer Root Capital uses factoring agreements, or lending against signed Business • We have deep industry relationships throughout the value chain, enabling us to understand and leverage the dynamics of 3. Ship goods the entire market. purchase orders between grassroots businesses and their buyers, • We have developed an effective lending model and a systematized risk management system based on ten years for short-term and long-term loans. The purchase agreement, in of operations. effect, replaces or decreases the need for traditional collateral 2. Make loans with • Our regional office structure enables us to efficiently service our existing clients and respond to the needs of as it represents a discrete, future revenue stream pledged to purchase order as collateral 4. Pay for goods potential borrowers. repay our loan. When the product is shipped, the buyer pays • Our local lending and financial education and training staff understand the business context and culture. 5. Remit Root Capital directly for interest and principal payments due payment, net • We hire field staff with direct experience working in management positions of rural SGBs. This equips our team with on the loan. To date, we have applied this factoring model with of loan principle first-hand familiarity with the challenges of running a financially viable grassroots business and an understanding of and interest the role credit can play in helping SGBs improve their operations. over 75 buyers, ranging from specialty importers such as Equal Root Capital Exchange and Sustainable Harvest to large global buyers such Our three-prong strategy—Finance, as Barry Callebaut, Green Mountain Coffee Roasters, McIlhenny Advise, and Catalyze—is designed Company, Starbucks Coffee Company, The Home Depot, and to respond to the market failures Whole Foods Market. More traditional, asset-backed loans comprise approximately 20% of our portfolio, although even in Figure 3. Root Capital’s Value and inefficiencies that exclude Catalyze these situations we leverage long-term value chain relationships Chain Finance Model rural grassroots businesses from Fostering the Field between borrowers and buyers to mitigate risk. affordable credit (see Figure 2). We aim to develop an inclusive system that addresses the capital constraints Strategy 2: Advise and capacity-building needs of the Finance Advise rural “missing middle.” Innovating Rural Building Local To help rural SGBs access capital investment to grow their operations, Root Capital trains grassroots business leaders and Finance Capacity engages with the financial institutions that we aim to attract to this market. Training Rural SGBs Figure 2. Root Capital’s Strategy Our training focuses on the “Five Financial Fundamentals,” which include building financial statements, managing credit 10 11
  • 8. collateral, financial planning, developing internal credit systems, and implementing financial policies. Through our pilot training Strategy 3: Catalyze program in Mexico and Central America, we have found that these skills are the most critical—and most often lacking—for rural SGBs applying for financing from a social or commercial lender. We deliver our training through two channels: Root Capital is helping to foster the field of development finance and catalyze the creation of a new capital class that bridges the “missing middle” between microcredit and commercial lending. Through the third prong of our organizational strategy, Financial Education and Training Workshops Catalyze, we engage in the following initiatives to elevate the field of SGB finance. Two- to five-day training sessions enhance the competitiveness of farmer and artisan associations and prepare them to administer larger and more complex operations through financing from Root Capital and local financial institutions. Workshop topics include: Share Knowledge and Best Practices Root Capital authors white papers and other publications to document and disseminate the insights we gather while • Basic financial management for grassroots business leaders and entrepreneurs, which teaches businesses to organize their implementing our model of value chain finance in developing countries. Examples of relevant issues to share include risk internal finances and create financial statements. • Creation and management of an internal credit fund for rural SGBs, enabling them to meet the individual credit needs of mitigation strategies, structuring high-volume cross-border transactions, geographic and product expansion, and balancing their farmer members, particularly during the cashless off-season, by issuing microloans. In the absence of microfinance our own financial performance as a hybrid social investment fund with our impact on the livelihoods of the rural poor. institutions in many rural areas, farmer and artisan cooperatives play a critical role in extending finance to their members with repayment generally linked to the sale of product at the harvest. Engage in Networks and Alliances • Financial literacy for farmers and artisans who serve on their peer-elected boards of directors, providing them basic financial Root Capital is an active participant—and in two cases a founding member—in innovative industry networks that convene skills so they can play an active role in overseeing their businesses. like-minded development entrepreneurs to advance a common agenda for greater access to finance, business training, and • Preparation for a loan from a local financial institution, detailing the commercial bank loan application process, the appropriate markets in support of small and growing businesses. We play a leading role in: presentation of financial records, and lessons on how to manage debt. • Aspen Network of Development Entrepreneurs (ANDE), an alliance that aims to alleviate poverty and improve lives through Root Capital seeks alliances and opportunities for “trainings of trainers,” enabling Root Capital to reach a greater number of investments in, and technical assistance to, SGBs in developing countries. Root Capital is a founding organization and a grassroots business managers and elected leaders in need of improved financial skills. member of ANDE’s Executive Committee. • Ashoka’s Social Investment Entrepreneur Fellows, a global network that seeks to transfer innovations between social One-on-One Technical Assistance financiers and the capital markets. During Root Capital’s due diligence process with prospective borrowers, our investment officers conduct rapid diagnostics to • Finance Alliance for Sustainable Trade (FAST), a trade association for social lenders, mainstream financial institutions, and determine if they have adequate financial management capacity to complete loan applications and manage debt. In cases related supply chain stakeholders. Root Capital is a founder and board member of FAST. where some capacity is lacking but businesses otherwise meet our lending criteria, investment officers provide targeted pre-investment technical assistance (typically two or three days on-site) to business managers. These engagements aim Form Partnerships and Pilots By collaborating with organizations and individuals working with grassroots businesses at various points in the value chain, to improve their skills and help them develop systems such as cash budgeting, internal controls, and the use of financial Root Capital strengthens the industry for sustainable products, providing benefits to rural SGBs and their farmer and artisan management reports. We also conduct one-on-one technical assistance with a sub-set of our borrowers with a lower level suppliers. We collaborate with the following categories of partners: of managerial capability. These clients receive training and capacity building during the course of a year with the aim of strengthening their financial management so that they can maximize the benefits of their loans and build a credit history—the • Global buyers to facilitate ethical, sustainable value chains with origins in developing countries. first steps on the path to eventually accessing finance from other financial institutions. • Technical assistance providers and other NGOs in areas such as agricultural production, business development, natural resource management, and third-party certification. A third group of borrower enterprises with significantly more capacity receives an “extra push” to assist them in accessing • Social impact investors at both local and global levels to incubate new solutions for increasing incomes that improve finance from third-party financial institutions. Investment officers spend two or three days with these organizations to address livelihoods for the rural poor. specific weaknesses in their credit applications and help them apply for financing from local financial institutions. Build Talent Bank Advisory To address the increasingly complex problems faced by rural communities, Root Capital is dedicated to attracting professionals Root Capital assists local financial institutions in entering rural markets by demonstrating the success of our existing lending to the industry who are equipped to offer innovative and practical solutions. Through our training programs for grassroots operations and by training institutions to apply value chain finance to rural SGBs. We train their investment staff on the adoption of business leaders and our Root Fellows program for young professionals, Root Capital is working to build the next generation our model, transfer market knowledge, and share risk mitigation techniques for sourcing and monitoring these loans. We also co- of development entrepreneurs to spread financial innovations and socially responsible business practices. invest with local banks that are interested in this market opportunity but not yet prepared to take on the full risk of such deals. 12 13
  • 9. I V . Growth Plan: Four Key Initiatives for Sustainable Impact Over the next five years, Root Capital will triple our lending activity, refine and expand our financial education and training systems to service, monitor, and collect our loans are clear and replicable, we have created a Loan Policy Manual that services for both grassroots businesses and local banks, and play a leadership role in the field of SGB finance. In conjunction details our lending practices, including underwriting standards, loan products, pricing, loan approval authority, and risk with these goals, we will continue to build our organizational infrastructure to ensure the sustainability of Root Capital as a management system. social enterprise. Upgrade Information Technology Systems Root Capital is developing information technology systems to increase the efficiency of our loan origination and portfolio 1. Finance: Triple Lending Activity management processes. In 2009, we will systematize our loan pipeline development through, which will Expand and Regionalize Lending Team allow us to efficiently monitor and analyze potential borrowers. It will also facilitate our geographic expansion by improving A key driver in Root Capital’s growth plan is building our lending team. Between 2009 and 2013, we will increase the number of connectivity between regional offices. investment officers from seven to 16 and the number of portfolio servicing and monitoring officers from five to 11. Concurrently, we will expand our lending field offices from locations in Kenya, Costa Rica, Nicaragua, and Peru to include an additional office At the same time, we are creating a customized and automated loan management system that tracks the details of each loan in West Africa, likely Ghana, in 2012. Of the new lending team members to be hired between 2009 and 2013, the majority will so that we can better monitor and analyze the risk profile of the portfolio. We can then incorporate this information back into be located outside of the United States. This expanded geographical presence is critical to our ability to pursue opportunities the loan origination process to more effectively manage the quality of our portfolio. quickly, ensure rigorous portfolio monitoring, and deeply understand local business environments and cultures. Expand Global Value Chain Relationships Enhance Financial Product Innovation Core to Root Capital’s strategy is embedding our lending activity in global value chains for leading importers, wholesalers, Root Capital will develop and test new products and services in areas such as cash flow-based lending for local supply chains and retailers in our target industries. This allows us to mitigate risk and achieve economies of scale while using credit to foster tied to domestic and regional sales, insurance and hedging products for grassroots businesses, payments to communities for long-term relationships between buyers and suppliers in sustainable global supply chains. As part of our portfolio growth plan, ecosystem services such as carbon offsets and watershed management, and loan syndication with local and global banking we plan to forge new partnerships with major global buyers by 2013. These relationships will support our growth in industries partners. We will also expand our lending in specialized areas, such as clean technology and loans for internal credit facilities. such as cotton, cocoa, sugar, fresh produce, and sustainable timber products. To accommodate the dynamic needs of growing grassroots businesses, we will offer larger, more varied loans to our established 2. Advise: Expand Financial Education and Training Program borrowers. At the same time, we will reach out to new borrowers in familiar industries and expand into new industries and Increase Advise Staff and Geographical Presence countries. We anticipate that non-coffee industry loans will grow from 24% of our portfolio in 2008 to more than 50% in 2013. By 2013, we will be offering financial education and training in Latin America and Africa. We will be staffed with four full-time Finally, we will continue to leverage the placement of our capital by pursuing co-lending opportunities with banks and other business trainers in northern Latin America, three in South America, and one in Africa. Root Capital investment officers will social finance institutions. In 2008, we leveraged $4 million in loan capital for our borrowers through co-investments; we also play an important role in delivering pre-investment technical assistance as part of their standard responsibilities. project that this figure will grow to $12 million by 2013. Conduct Workshops on the “Five Financial Fundamentals” Refine Lending and Risk Management Practices In 2007 and 2008, Root Capital served 55 cooperatives in Costa Rica, El Salvador, Guatemala, Honduras, Mexico, and As Root Capital scales our lending operations, we will continue to implement best-practice policies and procedures from Nicaragua through our pilot financial education and training program. Taking the lessons learned from our pilot program, the commercial banking, microfinance, and social investment industries. In pursuit of that goal, we have developed a two- we developed the “Five Financial Fundamentals,” which include training modules focused on building financial statements, part credit evaluation system that enables investment officers and other members of Root Capital’s Credit Committee to managing credit collateral, financial planning, developing internal credit systems, and implementing financial policies. We will identify the strengths and weaknesses of an enterprise and determine the most appropriate structure and terms for each continue to offer this training through workshops, one-on-one technical assistance, and inter-organizational exchanges. loan. The first part of the credit evaluation system assesses an enterprise based on its financial soundness, its social and environmental impact, and the quality of its management team. We then analyze the particular details of the credit request Formalize Pre-Investment Technical Assistance (e.g., loan amount, interest rate, collateral, repayment structure). Root Capital’s Credit Committee compares the enterprise We will expand our ability to help prospective Root Capital borrowers who require support in preparing and presenting their financial analysis with the loan details to determine if the credit request is appropriate for the particular organization. information in order to qualify for a loan. Our pre-investment technical assistance program provides two to three days of targeted one- on-one support that focuses on areas such as forecasting, preparing a cash flow, and organizing financial statements. Investment We have also developed a numerical portfolio risk classification system, which rates risk on each individual loan on a officers located in Latin America and Africa will dedicate an average of 15% of their time to providing this assistance. regular basis to provide a continuous understanding of the risk levels throughout the portfolio. To ensure that Root Capital’s 14 15
  • 10. Develop Capacity to Link Banks to campaign, an important part of which is this Private Offering Rural Businesses Memorandum. We currently receive funds from corporations, “The Rockefeller Foundation is Our long-term objective is to “crowd in” competition by accelerating foundations, individuals, socially responsible investment proud to support Root Capital as the entry of local banks into the rural SGB market. We are careful organizations, religious groups, and public agencies. part of our commitment to promote not to displace local banks that may already be serving prospective Through this Offering, we aim to broaden our funding base, impact investing. During a time when clients, and we have a policy of not competing with local financial particularly among corporations, foundations, and high net institutions when they are willing to finance potential clients on worth individuals. We will concomitantly grow our fundraising philanthropic and government dollars reasonable terms. We ask borrowers whether they have applied management systems to facilitate donor and investor alone are not sufficient to address for local bank finance and, if not, encourage them to research interaction and cultivation. the world’s social, environmental, their options before applying to Root Capital. As we have seen and economic challenges, innovative in Latin America, it is critical to do more than simply demonstrate Hone Marketing Strategy and solutions such as impact investing success; we must proactively accelerate the entrance of local Build Communications Plan can and must complement more banks into the market. We will hire a director who will engage Building on our branding work in 2008 with London-based communications firm ?What If!, Root Capital will develop a traditional strategies to finance bank executives and facilitate relationships between Root Capital investment officers and commercial lenders at the local branch brand messaging hierarchy to articulate our story to reach development.” level. Our investment officers will then introduce bankable clients each of our target audiences. To create higher levels of Judith Rodin to their counterparts at local financial institutions, assist clients in visibility and awareness, we will produce additional branded President the application process, and provide support on deal structuring and standardized materials; take part in events, award The Rockefeller Foundation and risk mitigation as needed to facilitate bank lending to our opportunities and conferences; increase press results; and most successful clients. enhance and leverage our website and communication vehicles. We will also expand current investor, donor, and corporate initiatives through targeted outreach and 3. Catalyze: Unlock Rural Capital Markets stewardship programs. Finally, to continue to build our credibility to support systematic change, we will strengthen our relationships in the rural finance industry and position Root Capital as an expert in the field. Build Partnerships and Networks Root Capital will play a leadership role in improving access to financial services for rural grassroots businesses, while Maintain Strong Infrastructure focusing industry attention on small and growing businesses in general. By sharing our experiences with other potential During 2008, Root Capital invested significantly in staff and systems to develop an infrastructure to support an international financial services providers and working with colleague organizations through networks such as ANDE, Ashoka’s Social loan fund of our size. With the explicit goal of establishing our organization as a “best place to work,” upcoming projects Investment Entrepreneur Fellows, and FAST, we will draw attention to the urgent need to increase financial services include completing the implementation of our IT strategy, developing more sophisticated tools and processes to integrate our targeting the rural “missing middle.” field offices, and focusing more heavily on professional and organizational development. Advance Thought Leadership Root Capital will continue to raise awareness about rural finance within the broader international development field by publishing or presenting our work to thought leaders, practitioners, policymakers, and the general public. Our senior staff will present at conferences for leading commercially- and socially-oriented investors or banking representatives. Finally, we will publish high-profile documents, including articles in trade journals and mainstream press, white papers, and case studies for international business schools. 4. Further Strengthen Global Operating Platform Broaden Fundraising Base To develop a strategy to reach our ambitious funding goals, Root Capital’s Business Development and External Affairs team has worked closely with our Board of Directors and senior management to design and implement a fundraising 16 17
  • 11. V. Risk Management Three categories of risk—portfolio, entity, and global economic—relate to our ongoing work and are addressed on a continual combines objective factors drawn from the applicant’s financial statements with subjective (yet standardized) evaluations in basis through our organizational structure, policies, and processes. Portfolio risk is “external” in the sense that it measures areas such as management capacity. risks having to do with the performance of borrowers, markets, and buyers; entity risk is “internal” in that it relates to Root Capital’s own performance. External Investment Committee The External Investment Committee, made up of select members of Root Capital’s Board of Directors and non-board members, Portfolio Risk (External) has the authority to approve or reject loans. The Committee delegates approval for certain categories of loans, particularly for loan renewals under specified dollar limits, to an Internal Investment Committee made up of Root Capital’s senior lending staff. Notwithstanding that delegation, any loan judged by the Internal Investment Committee to present an unusual risk profile As a lender, managing portfolio risk is critical to our core business. The following table identifies key areas of lending risk must be presented to the External Investment Committee. related to a given loan and strategies to mitigate these risks in our pre-investment credit evaluation process and our post- investment monitoring system. Loan Monitoring System Table 1. Lending Risk and Mitigation Root Capital staffs a loan monitoring team dedicated solely to monitoring the risk of all outstanding loans. The monitoring team collects data on 19 risk metrics in five areas of risk for all loans and calculates a risk rating on a regular basis (monthly or quarterly, depending on the loan). The risk ratings are used to categorize loans for the loan classification system. Type of Lending Risk Root Capital Mitigation Strategies Credit Risk Loan Classification System Production / delivery risk Use selection criteria that require successful sales history and buyer references; conduct due diligence visits to inspect operations; evaluate organization’s price risk management system Root Capital employs the loan classification system established for U.S. commercial credit by the Office of the Comptroller of Operational risk Conduct due diligence visits which include management meetings; review key staff the Currency (OCC). Root Capital’s system involves a judgmentally based risk rating that classifies all outstanding loans into qualifications; review internal controls OCC categories (current, specially mentioned, substandard, doubtful, loss), each of which allocate a specified percentage of Liquidy risk Analyze financial statements, seasonal cash budgets, and key ratios the outstanding balance to an allowance for loan loss accrual. We update this calculation monthly to ensure adequate loan Market / Context Risk loss allowances and reserves. The classifications also specify required actions for deteriorating loans, including collateral re- Market risk Lend against forward contracts or purchase commitments; look for premium pricing including evaluation and loan documentation review. certification premiums; limit advance to up to 60% of value of committed sales; draw upon partners and industry experts to conduct independent research on market trends Risk Management Committee Country risk Review country legislation on lending regulations and currency controls; avoid countries or This Committee works across all board committees to ensure that we identify and address the key risks facing Root Capital. regions experiencing conflict The Committee helps Root Capital establish policies and procedures for assessing and monitoring risks with the goal of Currency risk Match currency of loans to revenues (to date, dollarized loans to dollarized sales); expand portfolio over time to include hedging products and other options for mitigating creating a culture of risk awareness. For example, the Committee has helped Root Capital introduce the pre-investment risk currency risk rating system, our loan evaluation process, and our at-risk portfolio classification system. Counterparty Risk Integrity risk Lend against forward contracts with reputable firms, preferably buyers with long-term Entity Risk (Internal) relationships with clients and/or Root Capital Liquidity risk With new and unfamiliar buyers, request financial statements and incorporate into credit decision; run credit reports on new buyers; assess business’ outlook in context of market trends In addition to managing external risks associated with our portfolio, we perform a similar analysis of risk within our organization. Risk management within Root Capital is led by the Risk Management Committee and our Executive Team These strategies are incorporated into our rigorous credit evaluation, approval, and monitoring process. Some of the key and includes the following key areas of focus. structures and management tools are described below. Operational Risk Risk Rating in the Loan Origination Process This encompasses the potential for error, fraud, or failure to perform within Root Capital’s internal systems. As we have As part of the loan approval process, potential borrowers are given a risk rating using a proprietary scorecard system that grown, we have continually strengthened internal controls. In 2008, we hired a director of loan operations responsible evaluates the loan on multiple indicators in five areas: entity, production, management, collateral, and context. A scorecard for setting and assuring compliance with policies and controls for loan approval, documentation, and disbursement. In 18 19
  • 12. addition, we have launched automated systems to track our existing loans and potential borrowers. With these automated V I . Social and Environmental Impact “Root Capital is an innovative systems, we can more quickly reconcile and analyze data and organization tackling complex and identify issues requiring our attention. In addition to financial standards, Root Capital screens potential borrowers based on a series of social and environmental criteria. systematic problems. Through the We review enterprises’ social practices such as the prices paid to suppliers, employee wages and benefits, social programs provision of credit to low-income Liquidity Risk offered and community investments made, and the quality of their work environments. We consider environmental criteria such To manage our liquidity, we update our cash flow projections communities it is helping to build as soil and water conservation, the impact of the organizations’ agricultural practices, and their processing standards. weekly, looking at loan disbursements and repayments as well healthy, sustainable livelihoods and as notes payable to our investors, allowing us to ensure that When an applicant meets our criteria and a loan is approved, ongoing monitoring and evaluation of social and environmental protect threatened habitats.” lending commitments can be met with the available loan capital. impact is designed to enhance our services, make continual operational improvements among our borrowers, and elevate If during peak harvest periods projected disbursements exceed the field of rural finance by sharing our impact results. We project the following results in our key social and environmental available cash, we respond by reducing lending commitments, Sally Osberg performance metrics between 2009 and 2013. President and CEO drawing on a line of credit, or seeking co-investments. Skoll Foundation Table 2. Key Metrics, 2008 — 2013 Balance Sheet Risk Root Capital has built a strong balance sheet. At the end of 2008, 2008E 2009P 2010P 2011P 2012P 2013P Total: we had a debt to equity ratio just below 3:1, a cash-based Loan 2009-2013P Loss Reserve equal to 10% of our outstanding loans to borrowers, and an operating reserve equal to six months of operating Amount Disbursed $41.2 MM $53.1 MM $69.3 MM $85 MM $104.7 MM $121 MM $433 MM expenses. By 2013, our debt to equity ratio will increase to 4:1, while we maintain both reserves. # Loans Disbursed 158 194 245 299 354 392 1,484 # Borrower Enterprises 144 184 228 287 317 353 570* Global Economic Risk # Rural Producers Benefited 220,000 335,000 450,000 635,000 795,000 1 MM 1.6 MM* We continually monitor and assess the impact of the economic recession on our risk management practices and on our Borrower Enterprise Revenue $324 MM $492 MM $700 MM $1BN $1.3 BN $1.6 BN $5.1 BN operations in general. We anticipate that U.S. and European importers may experience long-term liquidity challenges Purchases from Rural Producers $261 MM $397 MM $565 MM $811 MM $1 BN $1.3 BN $4.1 BN due to the reduced availability of credit, resulting in slower payment to our borrowers from their buyers. Furthermore, # Businesses Trained 55 65 70 90 115 140 200* decreased consumer purchasing power in industrialized countries may lower the overall demand for higher-priced Total Acreage Under Sustainable 760,000 1.1 MM 1.4 MM 1.9 MM 2.2 MM 2.5 MM 4 MM* specialty foods and certified products. Cultivation However, a potential positive result for our borrower enterprises is that falling consumer demand and declines in global *Figures are based on total unique enterprises from 2009 through 2013. Individual enterprises and their associated metrics may be represented in multiple years due to loan renewals or repeat participation in training. commodity prices could increase the relative price premium to farmers selling differentiated, high-value products. Additionally, depreciating emerging-market currencies could benefit exporters in the countries in which we work. As Table 2 summarizes, from 2009 through 2013 Root Capital plans to disburse a total of $433 million in short-term working capital loans and long-term credit facilities to 570 rural SGBs. These loans will help to improve livelihoods for 1.6 million smallholder farmers On balance, the global credit crisis is likely to further limit the availability of local commercial credit to rural SGBs, resulting in and artisans and their families. We project that the grassroots businesses we support will generate more than $5 billion in revenue increased demand for Root Capital’s lending. during the five-year period, while directly purchasing more than $4 billion in goods from the small-scale farmers and artisans that supply them. We aim to improve the financial management capacity of 200 businesses through targeted financial training. The small-scale producers in our portfolio will oversee a total of four million acres of sustainable crops that have the potential to improve household incomes while protecting the surrounding landscapes, ecosystems, and species. Sustainable cultivation includes wild-harvested products such as nuts and native plants for essential oils, agroforestry crops such as shade-grown coffee and cocoa, and agricultural products such as sesame and bananas. While organic and other environmental certifications contribute to our analysis of each loan, we do not restrict our funding to certified products. With a broader approach, we are able to lend to environmentally sound businesses that have the lowest possible impact on their landscapes but may not be certified due to financial constraints, lack of economic incentive, or underdeveloped certification schemes in certain industries. 20 21
  • 13. VII. Five-Year Financial Operating Plan By the end of 2013, we will have tripled the revenue earned from interest and fees such that our lending business, Finance, disbursed in 2008. Our average loans outstanding will increase to approximately $59 million, an increase of almost $40 million will be operationally breakeven. At the same time, we will have significantly grown the donations that support specified Advise from our 2008 levels of approximately $19 million. and Catalyze actitivities (we refer to these philanthropic dollars as “fee-for-service” philanthropy to distinguish them from more general fundraising). As a result of the increase in these revenue streams, by 2013 we will see a significant reduction in our Finance overall fundraising burden. Table 3 summarizes how we will achieve this goal. During the growth period, we estimate that the amount of revenue earned from interest and fees through Finance will increase from “Root Capital goes way beyond $2.1 million in 2008 to more than $6.9 million in 2013. (Annual the delivery of credit to promote Table 3. Root Capital Financial Growth Plan (000s, except for loans disbursed) interest rates charged on our credit products are projected to financial capacity in the countryside 2008E 2009P 2010P 2011P 2012P 2013P average approximately 10%). After interest paid and allowance in a way that comprehensively builds for loan loss, our net earned and financial revenue is estimated rural enterprises into 'bankable' Loan Activity Overview to reach $5.1 million in 2013, compared with $1.2 million in # Loans Disbursed 158 194 245 299 354 392 businesses.” 2008. This means that net earned and financial revenue from Average Loan Size $261 $274 $283 $284 $296 $308 lending operations would grow on average at 34% per year while Maria Teresa Villanueva Total Disbursements $41,242 $53,128 $69,328 $84,979 $104,716 $121,001 associated operating expenses would increase at an average of Project Team Leader Average Loans Outstanding $19,461 $23,461 $30,862 $39,334 $49,513 $58,661 17%. Thanks to these economies of scale, by 2013 Finance will Inter-American Development Bank Finance cover its fully loaded (direct and indirect) costs and contribute Earned Revenue (Interest & Fees) $2,105 $2,860 $3,740 $4,756 $5,865 $6,921 positively to the bottom line. Interest Expense & Allowance for Loan Loss ($920) ($881) ($1,197) ($1,422) ($1,700) ($1,833) Net Earned and Financial Revenue $1,185 $1,980 $2,543 $3,333 $4,165 $5,088 Advise and Catalyze Finance: Direct Operating Expenses ($1,608) ($2,314) ($2,817) ($3,171) ($3,520) ($3,842) During the growth period, we aim to increase the amount of philanthropy we raise to support the delivery of our Advise and Finance: Indirect Operating Expenses ($665) ($951) ($987) ($1,108) ($1,178) ($1,207) Catalyze products and services. We project that this “fee-for-service” philanthropy will grow to $1.2 million by 2013, a ten-fold Finance: Surplus / (Deficit) ($1,089) ($1,286) ($1,262) ($946) ($534) $39 increase from the $120,000 raised for this purpose in 2008. Growth will be achieved through an expansion of our development Finance: Sustainability % 52% 61% 67% 78% 89% 101% staff, who will expand relationships with existing corporate partners as well as establish new relationships with global buyers, Advise and Catalyze economic development agencies, individuals, and foundations. Expenses associated with our Advise and Catalyze work will “Fee-for-Service” Philanthropy $120 $140 $225 $460 $800 $1,150 grow from $800,000 in 2008 to approximately $2.8 million in 2013. Total Operating Expenses ($795) ($1,225) ($2,026) ($2,430) ($2,658) ($2,812) Philanthropy Revenue and Burn Capital Ongoing (Non "Fee-for-Service") Philanthropy Operating Surplus (Deficit) Before Ongoing ($1,764) ($2,371) ($3,063) ($2,916) ($2,392) ($1,623) As “fee-for-service” philanthropic revenues grow, and as Finance achieves economies of scale, we will invest in our ability to Philanthropy raise Ongoing (non "fee-for-service") Philanthropy. We plan to increase this repeatable philanthropy from $300,000 in 2009 Ongoing Philanthropy $2,759 $300 $600 $1,000 $1,321 $1,623 (Non “Fee-for-Service”) to $1.6 million in 2013. While we have already demonstrated an ability to raise philanthropic support that is well in excess Operating Deficit Before Burn Capital $994 ($2,071) ($2,463) ($1,916) ($1,071) $0 of the 2013 target (we raised $2.9 million in 2008 including $120,000 in “fee-for-service” philanthropy) we believe there are opportunities to improve the ease and efficiency with which we raise these funds. Burn Capital Consumed $0 $2,071 $2,463 $1,916 $1,071 $0 Net Operating Surplus/(Deficit) and Burn Capital Consumed $7.5 million of “burn capital” consumed As Root Capital grows over the next five years, we will incur operating deficits across the three prongs of our strategy (Finance, Advise, Catalyze). These deficits, which are projected to total $7.5 million, will be covered by the “Burn Capital,” i.e., Lending Activity Overview dollars raised as part of this Offering to cover operating expenses during our expansion. (See Section VIII for details on the In 2013, we project disbursing approximately 392 loans, an increase from 158 in 2008. During the growth period, our average components of our campaign). At the end of the growth period, our operations—lending, financial education and training, field loan size will increase slightly from $261,000 in 2008 to $308,000 in 2013. Driven primarily by the increase in the number of building work, and fundraising—will collectively be strong enough to be self sustaining. loans booked each year, we therefore estimate disbursing more than $120 million in 2013, nearly tripling the $41 million we 22 23
  • 14. As detailed in Table 3 and further highlighted in Figure 4 below, by year-end 2013 we will have demonstrated that our Root Capital Financial Growth Plan operating model is economically sustainable. (numbers drawn from Table 3) • By 2013, Finance will be 100% self sufficient, generating $6.9 million in revenue from interest and fees, an amount sufficient to cover the $1.8 million of financial expense (interest paid and allowance for loan loss) and the $5.1 million of operating expense. From this point on, our lending activities will contribute directly to our bottom line. • By 2013, our Advise business will generate half of its revenue ($1 million) through philanthropic “fee-for-service” relationships Loans Disbursed Advise and Catalyze “Fee-for-Service” that directly support our financial training and education activities. At the same time, we will have built up our capacity to Philanthropy (000s) 450 $1,400 secure ongoing philanthropic donations that help cover our Advise operating expenses of $2 million. 400 • By 2013, we will be gaining significant traction in attracting revenue for our Catalyze activities, “earning” $200,000 in “fee-for- $1,200 350 service” philanthropy. We will also have an enhanced capacity to reliably raise the $600,000 required to cover the remaining $1,000 300 expenses associated with Catalyze’s activities. 250 $800 200 $600 150 $400 100 $200 50 0 $0 2008E 2009P 2010P 20011P 2012P 20013P 2008E 2009P 2010P 2011P 2012P 2013P Net Earned and Financial Revenue Ongoing (Non "Fee-for-Service") Philanthropy $6,000 (000s) $1,800 (000s) $1,600 $5,000 $1,400 $4,000 $1,200 $1,000 $3,000 $800 Catalyze $2,000 $600 $400 $1,000 $200 “Fee-for-Service”: $0.2 $0 $0 Ongoing Philanthropy: $0.6 2008E 2009P 2010P 20011P 2012P 20013P 2009P 2010P 2011P 2012P 2013P Operating Expense: ($0.8) Surplus (Deficit): $0 Finance: Surplus / (Deficit) Operating Surplus / (Deficit) before Burn Capital (000s) $500 (000s) Finance Advise $200 2008E 2009P 2010P 2011P 2012P 2013P 2009P 2010P 2011P 20012P 2013P $0 $0 Interest and Fees: $6.9 “Fee-for-Service”: $1.0 -$200 -$500 Financial Expense: ($1.8) Ongoing Philanthropy: $1.0 -$400 -$1,000 Operating Expense: ($5.1) Operating Expense: ($2.0) -$600 -$1,500 Surplus (Deficit): $0 Surplus (Deficit): $0 -$800 -$2,000 -$1,000 -$2,500 -$1200 -$1,400 -$3,000 Figure 4. Portrait of Sustainability — 2013 24 25
  • 15. Analysis of Growth Drivers VIII. Comprehensive Funding Requirements Table 4. Drivers of Root Capital’s Growth Projections As Table 5 details, Root Capital’s growth plan requires $63 million in total capital between 2009 and 2013—$55 million in Revenue (000s) 2008 2013* CAGR Drivers of Growth Expectations Growth Capital ($40 million in debt and $15 million in Philanthropic Equity), and $8 million in Ongoing Philanthropy and “fee- Finance Interest 1,637 5,830 28.9% • Grow average outstandings from $19MM to $59MM for-service” philanthropy. This infusion of funds will bring our lending operation to 100% self sufficiency and enable us to • Grow average interest rate from ~9% to 10.1% Fees & Co-lending 293 623 16.3% • Grow loans disbursed from $41MM to $121MM become a sustainable enterprise. Revenues • Average fee remains stable at ~0.5% Interest Earned or Cash 174 468 21.8% • Grow rate earned on cash from 2.3% to 3.0% • Grow average undeployed capital from $7.4MM to $16MM Table 5. Root Capital Comprehensive Funding Requirements (2009 — 2013) Interest Expense (484) (1,391) 23.5% • Increase in average notes payable from $19MM to $58MM • Maintain cost of debt at 2.5% $MM 2009P 2010P 2011P 2012P 2013P Total Allowance for Loan Loss (436) (442) 0.3% • Increase net growth in loans receivable from $5MM in ‘08 to $8.8MM in ‘13 • Maintain allowance at 5% I. Growth Capital Advise “Fee-for-Service” 120 1,000 52.8% • Increase “sales” of Advise days from approximately 170 to 950 A. Debt 7.2 7.5 8.0 8.5 8.9 40.0 • Grow daily rate from $700 to $1,050 B. Philanthropic Equity Catalyze “Fee-for-Service” -- 150 -- • Increase number of paid Catalyze engagements from 0 to 15 Burn Capital • Grow average fee per engagement to $10,000 Philanthropy 2,759 1,623 -10.1% • Decrease annual fundraising burden from $2.8MM to $1.6MM Finance • Improve institutionalization and systematization of fundraising efforts Direct Operating Expenses 2.3 2.8 3.2 3.5 3.8 15.7 Total Revenue 4,063 7,861 14.1% Net Financial & Earned Income 2.0 2.5 3.3 4.2 5.1 17.1 Finance Burn / (Contribution) 0.3 0.3 (0.2) (0.6) (1.2) (1.4) Operating Expense (000s) 2008 2013* CAGR Drivers of Growth Expectations Advise 0.3 0.8 0.9 0.8 0.6 3.5 Finance Executive Management 58 85 9.8% • Maintain 0.4 Executive FTE • 4% real and 4% inflation growth expense per year Catalyze 0.5 0.6 0.6 0.6 0.5 2.8 Credit Evaluations and 1,206 3,083 26.5% • Grow credit evaluation FTEs from 7 to 16 Operating Platform 0.9 0.8 0.6 0.3 0.1 2.7 Portfolio Servicing & • Maintain number of loans disbursed/FTE at around 25 Monitoring • Grow average loan size moderately from $261k to $308k Total Burn Capital 2.1 2.5 1.9 1.1 (0.0) 7.5 • Increase total disbursements from 158 loans totaling $41MM to 392 loans totaling $121MM due to growth in Credit Evaluation FTEs Balance Sheet Expansion • Grow Portfolio Servicing and Monitoring FTEs from 5 to 11 Loan Loss Reserve 0.5 0.8 0.9 1.0 0.9 4.1 • Grow assets under management/FTE from $8MM to $11MM due to enhanced sytematization as well as automation of portfolio administration Operating Reserve 0.4 0.3 0.2 0.2 0.2 1.4 Debt Fundraising 315 673 20.9% • Grow FTEs from 3.4 to 5 in Business Development Permanent Lending Capital 0.8 0.0 0.3 0.6 1.0 2.6 • Invest in additional outreach activities, website, and materials Total Balance Sheet Expansion 1.7 1.1 1.4 1.8 2.1 8.1 Advise Executive Management 29 43 10.2% • Maintain 0.2 Executive FTE Total Philanthropic Equity 3.8 3.6 3.3 2.9 2.1 15.6 • 4% real and 4% inflation growth expense per year Program Management 236 1,602 61.5% • Hire Vice President in 2008 Total Growth Capital (A+B) 10.9 11.0 11.3 11.4 11.0 55.6 and Delivery • Grow US based management from 0.4 to 1.4 FTE • Grow site based staff from 2 to 13 Catalyze Executive Management 88 1,602 10.0% • Maintain 0.6 Executive FTE II. Ongoing Philanthropy • 4% real and 4% inflation growth expense per year Advise 0.1 0.2 0.4 0.7 1.0 2.4 Program Management and 225 588 26.1% • Grow FTE from 2.4 to 6 Delivery • Invest in additional outreach activities, website, and materials Catalyze 0.0 0.0 0.1 0.1 0.2 0.3 Operating Executive Management 117 171 10.0% • Maintain 0.8 Executive FTE Operating Platform 0.3 0.6 1.0 1.3 1.6 4.8 • 4% real and 4% inflation growth expense per year Platform Total Ongoing Philanthropy 0.4 0.8 1.5 2.1 2.8 7.6 Finance & Administration 586 1,059 15.9% • Grow FTEs from 2.8 to 5.6 • Add HR Director, Operations Associate, and Staff Accountant and “Fee-for-Service” • 4% real and 4% inflation growth expense per year Total Funding Requirements (I+II) 11.4 11.9 12.7 13.5 13.8 63.3 Contribution Fundraising 210 449 20.9% • Grow FTEs from 2.2 to 4 Total Debt (IA) 7.2 7.5 8.0 8.5 8.9 40.0 • Invest in additional outreach activities, website, and materials Total Operating Expense 3,096 7,861 26.5% Total Philanthropy (IB+II) 4.2 4.4 4.8 5.0 4.9 23.3 Surplus / (Deficit) 994 (0) Total Funding Requirements 11.4 11.9 12.7 13.5 13.8 63.3 * Projected 26 27
  • 16. Growth Capital and multilateral organizations to support the financial education and training services we provide to grassroots “After several years of working with Debt ($40 million) businesses. Key current partners include Green Mountain Root Capital and seeing not only its Coffee Roasters and Starbucks Coffee Company, which To achieve our goal of attracting $40 million in new debt capital—$34 recognize the value of our financial education program in impressive track record, but also the million in senior and $6 million in subordinated debt—we will deepen advancing supply chain security. We project that by 2013, direct benefit to farming communities, our relationships within our current investor segments, which we will raise $1 million in revenue through such “fee-for- we started discussing how to expand include industry partners (e.g., specialty coffee roasters), charitable service” relationships. the relationship. We assessed it from foundations, socially responsible investment firms, religious orders, • Catalyze. From 2009 – 2013, we plan to spend $2.8 and high net worth individuals. We aim to raise $6 million of this million to develop and systematize our Catalyze activities. the perspective of a blended-value These activities will include actively disseminating debt subordinated with a 1% coupon. The structure and rate of investment vehicle that could provide our learning from the field through writing and public this tranche addresses our key obstacles for attracting mainstream Starbucks a modest financial return, appearances, collaborating with other institutions to capital—risk and return. The subordination provides an additional increase SGB access to capital markets, and creating a but more importantly, generate a layer of insulation to senior debtors in the event of a default, thereby training program to introduce young professionals to this tremendous social return in farming partially addressing risk concerns for those considering an investment growing field. communities worldwide.” in Root Capital. The 1% coupon provides us the flexibility to accept • Operating Platform. Underpinning the scaling and notes at rates above the average cost of capital of 2.5% that we must growth of these three programs is our operating platform, Sue Mecklenburg which includes our finance and administration, general maintain to achieve financial breakeven in our lending operations by VP Sustainable Procurement Practices management, and contribution fundraising. Of the $7.5 2013. Hence, this piece of our capital structure is catalytic, not only Starbucks Coffee Company million of “burn capital,” $2.7 million will be used to support supporting our revenue model to help us reach threshold scale, but the building and maintenance of this infrastructure. also playing a critical role in attracting mainstream capital over time. Balance Sheet Expansion ($8.1 million) While we do not plan to formally approach commercial debt markets during this period of growth, we do expect that these • Expansion of Loan Loss Reserve. Essential to our strategy is maintaining a Loan Loss Reserve level appropriate for markets will be important to the next phase of our growth once we have attained threshold scale. Other strategies to attract lending in high-risk markets. In addition to the Allowance for Loan Loss, which is an expense on our income statement, commercial debt will include considering vehicles such as credit enhancements from multilateral organizations or pooled we will grow our Loan Loss Reserve by $4.1 million over the five-year period such that we maintain reserves equal to callable guarantees from high net worth individuals. These tools would expand our ability to access financing from global 10% of loans outstanding. • Expansion of Operating Reserve. We will use $1.4 million of the Philanthropic Equity to increase our operating reserve banks. Finally, we will likely take advantage of lines of credit to cover short-term lending capital needs that arise during as we grow, maintaining it equal to six months of operating expenses. In doing so, we will help protect our operations peak lending months. Any such short-term borrowing is not included in the debt Growth Capital requirements. from unanticipated shocks. • Expansion of Permanent Loan Capital. To continue serving the most vulnerable segment of our grassroots business Philanthropic Equity ($15 million) clients as we grow lending volumes, we aim to raise $2.6 million in philanthropic capital to augment our permanent loan The anticipated uses of the $15 million of Philanthropic Equity we plan to raise include burn capital and balance sheet capital pool. This ensures capital availability for our borrowers, while building a healthy capital structure that underpins expansion. our organizational growth. Burn Capital ($7.5 million) Ongoing Philanthropy and “Fee-for-Service” Revenue ($7.6 million) To effectively scale our operations, we require philanthropic capital to subsidize our activities and achieve breakeven in our lending operation. In the course of raising $55 million in Growth Capital ($40 million in debt and $15 million in Philanthropic Equity), we will be investing in our capacity to more reliably raise money from philanthropic services. We will do this in two ways. First, between • Finance. Due to the favorable economics of our “spread” business as we grow and the existing maturity of our lending 2009 and 2013, we anticipate raising $2.7 million in donations that directly support our Advise and Catalyze activities (i.e., operations by 2011, Finance will cover all of its direct costs, and, in aggregate, through 2013 will contribute $1.4 gifts that support services such as the delivery of financial education and training or the authoring of a publication). After 2013 million to covering the costs of the operating platform. By 2013, Finance will cover its fully loaded costs and begin we will continue to build these businesses to ensure their sustainability. Second, during the growth period we will similarly contributing positively to the bottom line. • Advise. As Advise activities grow in the coming years, this line of business will require increasing subsidy, totaling $3.5 invest in our capacity to fundraise efficiently to support our overall mission. By building our team and systematizing our donor million during the five-year growth period. However, we will use this Growth Capital not merely to subsidize operations cultivation and stewardship practices, we will achieve significant advances in our fundraising ability. We project that this but rather to focus on building a long-term business model that creates a standard offering that appeals to a wide range will translate into raising $4.8 million in Ongoing Philanthropy during the growth period, positioning us to meet our ongoing of donors. To do this, we will continue to develop relationships with industry partners, commercial financial institutions, fundraising need every year thereafter. 28 29
  • 17. IX. 2009 — 2013: Philanthropic Equity Offering Terms and Conditions All Philanthropic Equity Investment associated with this Root Capital 2009 – 2013 Private Offering Memorandum is subject • Accounting Treatment for Subsequent Philanthropic Equity Funding. Any subsequent investment of Root Capital SM to the donor imposed terms and conditions enumerated below, which comply with the SEGUE (Sustainable Enhancement philanthropic equity will be accounted for using accounting methods similar to those used for the Root Capital 2009 – 2013 Grant) methodology developed by Nonprofit Finance Fund, a certified Community Development Financial Institution based in Private Offering Memorandum, but tracked separately, using a separate temporarily restricted sub-account. • Exhaustion of SEGUESM Funds Before Release of Subsequent Philanthropic Equity Funds. Subsequent rounds of New York City. The SEGUESM methodology is designed to provide philanthropic investors with an equity-like experience. Root Capital philanthropic equity may be raised at any time. However, subsequently raised funds may not be released unless and until all funds from this round have been fully released. • SEGUESM. The word “SEGUESM” refers to Sustainable Enhancement Grant, a fully GAAP-compliant grant-making • Investor Report. Beginning in the first quarter of 2010 and ending fourth quarter 2016, Root Capital will produce a quarterly methodology developed by Nonprofit Finance Fund. report that provides a comprehensive view of financial and programmatic results as compared to annual and quarterly • Exclusion of Note Offering. SEGUESM terms and conditions do not under any circumstances apply to Root Capital’s operating objectives. From time to time, at the discretion of Root Capital’s management and board, the metrics included in debt offering, which is described separately in Root Capital’s Note Offering Disclosure Statement and the related form of the report may be changed to reflect Root Capital’s evolving business dynamics. Each quarter, a copy of this report will be promissory note and loan agreement. sent to each Philanthropic Equity Investor. • Philanthropic Equity Investment. The words “Philanthropic Equity Investment” refer to contributions that are entirely • Information Rights for Nonprofit Finance Fund. Nonprofit Finance Fund will receive copies of all information that is charitable in nature and will generate no financial returns to the investor. disseminated to Philanthropic Equity Investors, as described in this statement of investment terms and conditions • Philanthropic Equity Investment Offering. This Private Offering contains up to 180 non-assignable Root Capital 2009 – • Restrictions on Investment Proceeds. Root Capital’s use of 2009 – 2013 Philanthropic Equity Investment proceeds is 2013 SEGUESM Units, at $100,000 per Unit. hereby, until December 31, 2015, restricted as follows: • Philanthropic Equity Investor. The words “Philanthropic Equity Investor” refer to any person or institution that has made 1. At the end of each fiscal year, Root Capital will provisionally calculate its Change in Unrestricted Net Assets a charitable grant to Root Capital pursuant to the Philanthropic Equity component of this 2009 – 2013 Private Offering “as if” no releases were to be made from temporarily restricted Root Capital 2009 – 2013 Philanthropic Equity Memorandum. Investment funds. • SEGUESM Unit. A SEGUESM Unit is defined as a formal mechanism by which Root Capital recognizes the roles played 2. If this provisional calculation yields a Change in Unrestricted Net Assets greater than 5% of operating expenses, by Philanthropic Equity Investors who provide equity-like capital required to produce a Root Capital enterprise that is fully then Root Capital 2009 – 2013 Philanthropic Equity Investment funds may not, in that fiscal year, be released self-sustaining under its chosen long-term business model. Holding SEGUESM Units does not constitute ownership in Root except as noted below in items 4 and 5. Capital. Philanthropic Equity Investors hold no board seats, unless formally invited by Root Capital to join the Board, and 3. Otherwise, Root Capital 2009 – 2013 Philanthropic Equity Investment funds will be released such that the have no voting rights. Change in Unrestricted Net Assets is equal to up to 5% of operating expenses. • Maintenance of Capitalization Table. Root Capital will maintain a definitive list of SEGUESM Philanthropic Equity Investors, 4. In addition, if, at fiscal year end, Root Capital’s Loan Loss Reserve is less than 10% of Loans Receivable, identifying their names, contact information, and invested amounts. This roster will not be altered unless a new Philanthropic additional Root Capital 2009 – 2013 Philanthropic Equity Investment funds may be released such that the Equity Investor is added, either in connection to the Root Capital 2009 – 2013 Private Offering Memorandum, or in connection Loan Loss Reserve is equal to 10% of Loans Receivable. to subsequent Root Capital philanthropic equity offerings. 5. In addition, if, at fiscal year end, Root Capital’s debt to equity ratio (calculated using all unrestricted and • Identification of Philanthropic Equity Investors. Root Capital will provide each Philanthropic Equity Investor with the 2009 temporarily restricted net assets except those restricted for programs by time or purpose) is greater than 3:1, – 2013 SEGUESM Capitalization Table. Starting with the close of fiscal year 2009, any change in the roster of Philanthropic additional Root Capital 2009 – 2013 Philanthropic Equity Investment funds may be released such that the debt Equity Investors or amounts invested by each will be communicated within 90 days of the most recent quarter end to all to equity ratio is no more than 4:1. Philanthropic Equity Investors. Each Philanthropic Equity Investor will be offered the option to be listed as “Anonymous” on 6. Beginning January 1, 2016 and thereafter, use of any remaining Root Capital 2009 – 2013 Philanthropic Equity this shared communication. Investment proceeds are not subject to donor-imposed restrictions. • New SEGUESM Sub-Account. Root Capital will establish a new temporarily restricted sub-account, called “Root Capital 2009 – 2013 SEGUESM”, which will be tracked and reported upon as part of Root Capital’s standard internal financial reporting. All Philanthropic Equity proceeds from this offering will be accounted for through this SEGUESM Sub-Account. • Campaign Close. Root Capital will affirmatively declare a close of the campaign associated with this Root Capital 2009 – 2013 Private Offering Memorandum and communicate an Official Close Date to all Philanthropic Equity Investors. • Permissible Flows. The Root Capital 2009 – 2013 SEGUESM temporarily restricted Sub-Account may be increased only by temporarily restricted funder commitments or grants from Philanthropic Equity Investors that are explicitly identified as members of the 2009 – 2013 SEGUESM Philanthropic Equity Investor group. Following the Official Close Date, no commitments or grants of any kind may be added to this Sub-Account. • Communication of Inflows and Outflows. Philanthropic Equity Investors will regularly be informed, at a summary level, of all annual inflows and outflows from the Root Capital 2009 – 2013 SEGUESM Sub-Account. 30 31
  • 18. Appendices A. Awards and Recognition A. Awards and Recognition 2008 • SVN Innovation Award. Supports the “next generation” of socially responsible leaders by providing them access to the people and resources that can help B. Press support the growth and success of their enterprises. C. Executive Team • Clinton Global Initiative Member. The 2008 CGI Annual Meeting convenes global leaders to devise innovative solutions to some of the world’s most D. Board of Directors pressing challenges. E. Organizational Structure – 2009 • World Economic Forum Young Global Leader. Awarded annually to recognize and acknowledge the top 200-300 young leaders from around the world for their F. Pro Forma Financials professional accomplishments and commitment to society. G. Our Colleagues • Fast Company/Monitor Group Social Capitalist Award. Recognizes innovative nonprofits applying business savvy to social problems. • Charity Navigator 4-Star Rating. Evaluates charities on a 4-star rating system. • Skoll Award for Social Entrepreneurship. Supports social entrepreneurs whose work has the potential for large-scale influence on critical challenges of our time. 2007 • Ashoka Fellowship. Recognizes the world's leading social entrepreneurs for their innovative solutions to some of society's most pressing social problems. • Fast Company/Monitor Group Social Capitalist Award. • Charity Navigator 4-Star Rating. • Skoll Award for Social Entrepreneurship. 2006 • World Business Award in Support of the Millennium Development Goals. • “40 Under 40” Award from the Boston Business Journal. • Fast Company/Monitor Group Social Capitalist Award. • Charity Navigator 4-Star Rating. • Skoll Award for Social Entrepreneurship. 2005 • Yale S.O.M-Goldman Sachs Foundation Award. • Skoll Award for Social Entrepreneurship. 32 33
  • 19. B. Press C. Executive Team 2009 • Stanford Social Innovation Review. “Root Solutions: Nonprofit lender Root Capital William F. Foote, Founder & CEO connects rural farmers and artisans with the corporations that crave their products.” Mr. Foote began his career as a financial analyst in the Latin American CPA and holds an honors degree in business from the University of North Spring 2009 Corporate Finance group at Lehman Brothers, and as a journalist in Carolina at Chapel Hill. • Ode. “Never Let a Crisis Go to Waste: Social entrepreneurs see the economic Mexico and Argentina. In March 2008 he was named a Young Global upheaval as a chance to go mainstream.” March 2009 Leader by the World Economic Forum, and he was named an Ashoka Cynthia L. Greene, VP Global Programs Global Fellow in September 2007. Mr. Foote is on the Executive Ms. Greene oversees Root Capital’s lending, education and 2008 • MarketWatch. “Social Venture Network Announces 2008 Innovation Award Winners.” Committee of the Aspen Institute’s Aspen Network of Development training, and strategy and innovation efforts. Ms. Greene has Entrepreneurs (ANDE) and is a founding Board member of the Finance extensive experience solving strategic, operational, and financial October 13, 2008 Alliance for Sustainable Trade (FAST). He is a life member of the Council issues at international companies and nonprofits. Prior to joining • MarketWatch. “Clinton Global Initiative Announces Innovative Coffee Partnership.” on Foreign Relations and serves on the Boards of the Open Learning Root Capital, she worked for Electric Insurance, General Electric’s September 26, 2008 Exchange (OLE) and E+Co, which finances businesses that supply insurance company, managing the growth and profitability of its • Financial Times. “Investors Boost the ‘Missing Middle.’” June 24, 2008 clean and affordable energy in the developing world. Mr. Foote holds a Midwest business. Previously she worked for The Boston Consulting • LA Times. “The Price of Hunger.” June 23, 2008 B.A. from Yale University and a M.Sc. in development economics and Group and in investment banking for J.P. Morgan in New York and • Miami Herald. “Root Capital Helps Grassroots Eco-ventures.” April 21, 2008 economic history from the London School of Economics. He is fluent in Venezuela. She holds an M.B.A. from The Wharton School, an M.A. • “Do-Gooder Finance.” February 2008 Spanish and Portuguese. in international affairs from Johns Hopkins’ School of Advanced International Studies, and a B.A. in math and environmental studies 2007 • NuWire Investor. “Top 15 Charities for Investors for 2007.” November 26, 2007 Diego Brenes, VP Lending, Origination from Dartmouth College. She speaks English and Spanish. • The Milken Institute and the German Marshall Fund of the United States. Mr. Brenes oversees the lending team, particularly focused on “Transatlantic Innovations in Affordable Capital for Small- and Medium-Sized Enterprises.” origination and evaluation of clients and deals. A Costa Rican national, Namrita Kapur, VP Strategic Partnerships October 2007 Mr. Brenes worked as a financial controller and an investment officer Ms. Kapur manages relationships with key partners and develops • Microfinance Insights. “From Grower to Green Market: Bridging the Rural Finance with two venture capital funds in Central America prior to joining Root major strategic initiatives. Prior to joining Root Capital, Ms. Kapur Gap.” September 2007 Capital. Before that, he worked in commercial banking as a branch was an equity research analyst at the investment bank, Adams, manager, loan officer, and financial analyst. Mr. Brenes holds an M.Sc. Harkness & Hill (now CanAccord Adams). She has previously directed • Boston Business Journal. “Root Capital founder wins prestigious non-profit fellowship.” in environmental science from Lund University (Sweden) and a B.A. in programs for the Environmental League of Massachusetts and October 17, 2007 business administration from Universidad Autónoma de Centro América Berkshire Natural Resources Council, and worked as a consultant • “Giving Back.” June 23, 2007 (Costa Rica). He is fluent in Spanish, English, and Portuguese. for the United Nations Development Program. She currently serves on the Board of the Environmental League of Massachusetts. Ms. 2006 • Fast Company. “Prime Partners: EcoLogic Finance.” December 2006 Liam Brody, VP Business Development & Kapur holds an M.B.A. from Yale University, an M.E.M. from Yale • Boston Business Journal. “40 Rising Stars.” October 6, 2006 School of Forestry & Environmental Studies and a B.A. in molecular External Affairs • Fresh Cup Magazine. “40 Under 40, Filling the Finance Gap for Coffee Growers.” biology from Princeton University. Along with English, she speaks Mr. Brody builds relationships with key partners in the private sector August 2006 Hindi, Portuguese and Spanish. and directs Root Capital’s business development strategy. Prior to joining Root Capital, he served as deputy director of Oxfam’s private Prior • Miami Herald. Foote, William. “A Healing Brew: Community-based Commerce Helps sector department. Previously, he was the director of sustainable coffee José Luis Rojas Villarreal, VP Lending, Mend the Broken Nation of Rwanda.” November 29, 2004 at Green Mountain Coffee Roasters and led Oxfam International’s Portfolio Management • New York Times. “Berry Sales to U.S. Offer Security to Amazon Farmers.” campaign to end the global coffee crisis, which led to the introduction Mr. Rojas oversees Root Capital’s lending program, particularly focused August 4, 2004 of Fair Trade-certified coffee by some of the world’s largest coffee on monitoring, collections, and portfolio risk management. Prior to • LA Times. Foote, William Fulbright. “Swimming Against Tide of Overfishing.” sellers. Mr. Brody holds a Master of Education in Social Policy from the joining Root Capital, Mr. Rojas worked as an equity research associate December 29, 2002 Harvard Graduate School of Education and a B.S. in Agricultural and at UBS Warburg in Mexico, as a pro-bono consultant at the Soros • Miami Herald. “Loan assists coffee growers; Fund brightens a bleak market.” Extension Education from Cornell University. Foundation in Mongolia, a consultant at the United Nations in Ethiopia, March 6, 2002 and as an aluminum industry analyst/consultant at CRU International. • LA Times. “Loan Program Stirs Hope for Poor Mexican Coffee Growers.” Bonnie C. Cockman, VP Finance & Administration He is currently a member of the Boston Securities Analyst Society Ms. Cockman directs Root Capital’s finance, human resources, and holds the Chartered Financial Analyst designation. Mr. Rojas November 11, 2000 information technology, legal, and office administration systems. Prior holds an M.I.A. in international finance and economic development • Wall Street Journal. “Sen. Fulbright’s Kin Does Well by Doing Good in Latin Climes.” to joining Root Capital, Ms. Cockman worked as the vice president of from Columbia University, and a B.A. in international relations and January 28, 2000 finance for Conservation International over an 8-year period when the economics from the University of Pennsylvania. A Mexican national, he • Wall Street Journal. Foote, William Fulbright. “In Guatemala, Organic Farms Sprout on is fluent in Spanish, English, and French. organization grew from $30 million in annual expenses to $115 million. Civil War Turf.” October 9, 1998 She also served as director of finance for Georgetown University’s Center for Intercultural Education and Development. Ms. Cockman is a 34 35
  • 20. D. Board of Directors E. Organizational Structure – 2009 Deborah Drake – Board Chair Program Manager, Investing in Inclusive Finance, Center for Financial Inclusion, ACCION International Kenneth S. Ansin Board of Directors Director, Enterprise Bank and Trust Company Henry A. (Hank) Cauley Senior Officer, Pew Environment Group, Pew Charitable Trusts CEO Frank Hicks Vice President of Investment Opportunities, Bio-Logical Capital VP VP VP VP Thomas A. Kaneb Finance & Adm Bus Dev & EA Strategic Partnerships Global Programs Partner, Miralta Capital Juan P. Morillo Partner, Clifford Chance US LLP Laurel J. Neylon VP Origination VP Portfolio Management Senior Regional Director, Office of Capital Giving, Faculty of Arts and Sciences, Harvard University Mg. Dir. Philanthropic Regional Director Regional Director Matthew Patsky Investments Latin America Africa Partner and Portfolio Manager, Winslow Management Co. Jonathan Rosenthal Principal, Just Works Consulting Director Human Nancy Rosenzweig Director Institutional Director Marketing & Director Impact Director Loan Director Education Director Strategy & Resources Relations Communications Assessment Operations & Training Innovation Social Enterprise Entrepreneur John F. Taylor Board Chair, Alliance to End Hunger Jean L.S. Hazell – Director Emerita Research Associate, Harvard Business School 36 37
  • 21. F. Pro Forma Financials G. Our Colleagues (000s, except for loans disbursed) 2008E 2009P 2010P 2011P 2012P 2013P Despite the growing number of social finance organizations targeting rural SGBs in developing countries, the marketplace Lending Activity remains nascent with demand for capital far outstripping supply. The scope of capital aggregators and alternative investment # Loans Disbursed 158 194 245 299 354 392 programs serving rural SGBs in the developing world ranges from purely financial institutions with a social orientation to Average Loan Size $261 $274 $283 $284 $296 $308 environmental groups that see finance as one of many ways to achieve their conservation goals. Total Disbursements $41,242 $53,128 $69,328 $84,979 $104,716 $121,001 Average Loans Outstanding $19,461 $23,461 $30,862 $39,334 $49,513 $58,661 Finance The following are financial institutions committed to sustainable production and trade that focus on deploying capital to SGBs Interest Earned on Loans $1,637 $2,312 $3,017 $3,866 $4,879 $5,830 in developing countries: Fees $293 $309 $384 $460 $553 $623 Interest Earned on Cash $174 $239 $338 $429 $433 $468 AlterFin (Finland) Calvert Social Investment Fund (US) Earned Revenue $2,105 $2,860 $3,740 $4,756 $5,865 $6,921 CORDAID (The Netherlands) EcoEnterprises Fund (US) Allowance for Loan Loss ($436) ($247) ($402) ($442) ($521) ($442) Etimos (Italy) Oikocredit (The Netherlands) Interest Expense ($484) ($634) ($794) ($980) ($1,180) ($1,391) Net Earned and Financial Revenue $1,185 $1,980 $2,543 $3,333 $4,165 $5,088 Rabobank Foundation (The Netherlands) RSF Social Finance (US) Finance: Operating Expense ($2,274) ($3,265) ($3,804) ($4,279) ($4,698) ($5,049) Shared Interest (UK) SosFaim (Finland) Finance: Surplus / (Deficit) ($1,089) ($1,286) ($1,262) ($946) ($534) $39 Triodos Sustainable Trade Fund (Netherlands) Verde Ventures (US) Finance: % Sustainability 52% 61% 67% 78% 89% 101% Advise and Catalyze Several of these institutions have come together to form the trade association Finance Alliance for Sustainable Trade (FAST), Advise and Catalyze: “Fee-for-Service” $120 $140 $225 $460 $800 $1,150 of which Root Capital is a founding member. Advise and Catalyze: Operating Expense ($795) ($1,225) ($2,026) ($2,430) ($2,658) ($2,812) Advise and Catalyze: Surplus / (Deficit) ($675) ($1,085) ($1,801) ($1,970) ($1,858) ($1,662) Philanthropy Revenue and Burn Capital Another set of organizations is focused on supporting enterprises and entrepreneurs in the developing world that create Op. Surplus / (Deficit) before Ongoing Philanthropy ($1,764) ($2,371) ($3,063) ($2,916) ($2,392) ($1,623) jobs and build capital while providing other social goods, such as environmental stewardship and improved access to Ongoing Philanthropy (non “Fee-for-Service”) $2,759 $300 $600 $1,000 $1,321 $1,623 healthcare. These institutions work across industry verticals from sustainable trade to renewable energy to housing and Growth Capital to Cover Operating Deficits $0 $2,071 $2,463 $1,916 $1,071 $0 health and include: Net Operating Surplus / (Deficit) $994 $0 $0 $0 $0 $0 Growth Capital for Balance Sheet Expansion $400 $1,694 $1,127 $1,393 $1,815 $2,084 Acumen Fund (US) Agora Partnerships (US) Change in Net Assets $1,394 $1,694 $1,127 $1,393 $1,815 $2,084 BlueOrchard Finance, S.A. (Switzerland) E+Co (US) Balance Sheet Assets Endeavor (US) Grassroots Business Fund (US) Cash and Equivalents $9,940 $13,723 $14,296 $14,920 $14,852 $17,042 Kickstart (US) Small Enterprise Assistance Fund (US) Loans Receivable Net of Allowance $18,543 $23,238 $30,885 $39,280 $49,171 $57,569 TechnoServe (US) United Villages (US) Other Receivables $716 $909 $1,198 $1,497 $1,860 $2,165 VisionSpring (US) Other Assets $206 $160 $113 $67 $73 $78 Total Assets $29,405 $38,029 $46,492 $55,764 $65,957 $76,855 Root Capital is a founding member and active participant in the Aspen Network of Development Entrepreneurs (ANDE), which Liabilities Notes Payable $21,757 $28,554 $35,749 $43,499 $51,751 $60,439 includes the organizations above and others working to promote economic development in the developing world. Other Liabilities $387 $520 $660 $789 $915 $1,041 Total Liabilities $22,143 $29,074 $36,409 $44,288 $52,666 $61,480 Net Assets Net Assets Available for Lending $3,272 $4,042 $4,046 $4,307 $4,876 $5,914 Loan Loss Reserves $1,952 2,446 $3,251 $4,135 $5,176 $6,060 Operating Reserves $2,038 $2,468 $2,786 $3,034 $3,239 $3,400 Total Net Assets $7,262 $8,956 $10,083 $11,476 $13,291 $15,375 Total Liabilities and Net Assets $29,405 $38,029 $46,492 $55,764 $65,957 $76,855 38 39
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