2009 — 2013 Private Offering Memorandum
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.
# 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
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.
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
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.
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.
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
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.
Since Root Capital’s founding in 1999, our mission has been to pioneer finance
40 for grassroots businesses that build sustainable livelihoods and transform rural
communities in poor, environmentally vulnerable places. Trapped in the “missing
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
businesses (SGBs) can lift entire communities out of poverty and strengthen the
health of our planet.
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.
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
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
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.
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
Figure 1. "Missing Middle" and Rural Finance Gap
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
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
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.
• 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.
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
• 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
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
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
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
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
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.
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.
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.
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 Salesforce.com, 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
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
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
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
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.
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.
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
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.
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.
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