Energy Access Debt Fund

Climate Investing Track

responsAbility Investments AG is an asset manager in the field of development investments and offers professionally-managed investment solutions to private, institutional, and public investors.

Click here for a legal disclaimer from responsAbility 

Overview of responsAbility

Founded in April 2003, and now with more than USD 3 billion in assets under management, the company’s investment solutions supply debt and equity financing predominantly to non-listed firms in renewable energy, agriculture and financial inclusion in emerging and developing economies. Through their inclusive business models, these firms help to meet the basic needs of broad sections of the population and drive economic development.

Motivation for the Energy Access Fund

Access to energy is a key driver of economic growth, yet many emerging market countries still face significant challenges in power generation and distribution, resulting in a population of over a billion people without access to electricity. According to the International Energy Agency (IEA), providing electricity for all by 2030 would require an annual investment of USD 52 billion per year, more than double the current level being mobilized. The investment objective of the Energy Access Fund is to bridge this gap towards more universal access to modern energy, by providing debt financing to entities which operate across the entire value chain in the energy sector. These small and medium size businesses (SMEs) operate in developing markets, and largely target low income households as well as SMEs. The ultimate beneficiary is typically the population with limited, unreliable, or no access to energy.

Structure of the Fund:

The Energy Access Fund provides working capital financing to companies selling solutions that provide access to clean energy to underserved populations.

STRUCTURE DETAILS

Assets Under Management

USD 34 million

Inception Year

2015

Geographic Focus

Sub-Saharan Africa, Asia Pacific

Term

Closed, 10 Year

Impact Focus

Provide clean and affordable power to underserved SMEs and households

SDGs Targeted

#1: No Poverty

#3: Good Health and Well-Being

#5: Gender Equality

#7: Affordable and Clean Energy

#12: Responsible Consumption and Production

#13: Climate Action

#17: Partnerships for the Goals

Fund Capitalization

Two share classes,

Senior equity (88%): Private capital

First loss and mezzanine (12%): public and risk tolerant investors

Technical Assistance Facility

Current: USD 0.55m

Underlying Assets

Senior loans

Size of Investments

Average of USD 1.5m

Target Return

Various across tranches

Blended Finance Elements

The fund is structured as a blended finance vehicle, using risk-tolerant capital from philanthropic and public sources to create an attractive investment opportunity for private sector investors. Because the energy access sector is not fully mature, the track records of all funds in this space are limited. Therefore, mobilization of the private sector depends on catalytic partners - in this fund, investors in the junior share classes.  The risk protection, consisting of the first loss and mezzanine tranches, amounts to 12% of the NAV (net asset value). 

Technical Assistance Facility

Companies in the energy access sector face a set of challenges that can prevent rapid scale if not addressed. Besides difficulty in raising fit-for-purpose funding for growth and expansion, issues are mostly operational, including human resource management, and project and market selection and expansion. To mitigate these challenges, reduce borrower risk, and contribute to the maturation of the clean energy access sector, the Energy Access Fund has developed a Technical Assistance Facility (TAF) to strengthen the operational capacity of the portfolio companies of the fund. Areas of support include:

  • Market Building: Technical assessments of emerging business models, market studies to benefit company’s expansion, or backing of targeted company research (including supply chain).
  • Operational Scale Up: Support to companies who intend to enter new markets, or revise business model to achieve larger scale.
  • Business Management and Financial Models: Advice on business plans, cash flow management, budgeting, and structured finance solutions.
  • ESG Management: Support in implementing environmental and social risk management systems, as well as impact tracking and reporting.

Underlying Assets:

The final beneficiaries of the Energy Access Fund are normally households. There are approximately 1.2 billion people living without access to power grids, 97% of which are in sub-Saharan Africa and Asia Pacific. In sum, they spend USD 27 billion per year on lighting and charging. Reliable sources of energy for these households might include solar lanterns (which replace kerosene or other solid fuel burning by providing access to reliable light - some with options for small device charging) and solar home-systems (which provide household-level access to energy for charging, electricity, and lighting). Both contribute to significant reduction in harmful emissions, including particulates that impact human health and carbon, and can also act as a source of income generation.

Sample Company

Distributes, sells, and installs solar lanterns and Solar Home Systems (SHS) products via a mobile money PAYG system in Africa and Asia. The company was incorporated in 2008 and recently reached profitability. The loan provided was a USD $4 million senior corporate loan disbursed in tranches which would be used to finance working capital.

Types of Financing provided by the fund:

The fund has provided senior loans, either secured or unsecured.

Impact Measurement and Management:

Provision of clean and affordable power has significant impact on households while it reduces reliance on dangerous and emissions-heavy lighting sources. The Energy Access Fund seeks to provide access to clean energy for households and SMEs. responsAbility collects data from their borrowers across a set of defined outcome objectives.

  • Reduced reliance on dangerous and polluting light sources
  • Increased productive hours for work and education
  • Increased connectivity for improved access to information
  • Reduced expenditure for light
  • Reduction of greenhouse gasses

Lessons Learned:

In structuring and going to market with this fund, responsAbility has identified key learnings – on the structure of the fund, as well as on the energy access market more broadly - which they will incorporate into their ongoing work in energy access.

 

Lessons Learned on Fund Structure:

  1. The structure must respond to investors’ needs and be simple: The structure should meet most investors’ expectations and be simple at the same time. Therefore it’s key to know early which investors will be targeted.
  2. The investment strategy must be flexible: Operating in new markets requires a high degree of flexibility, and the ability to adapt to fast moving market conditions is key. Therefore investment guidelines should be kept as flexible as possible. This can be challenging especially when key (catalyst) investors want to pursue their individual interests.
  3. Investors are partners: Catalytic investors play a crucial role in blended finance vehicles. Their interests and requirements need to be considered but should not create additional restrictions. A partnership approach with active involvement of the investors and an open communication is key.

Lessons Learned on the Energy Access Market:

  1. Need for fit-for-purpose financing: There is a real demand for well-structured, and often larger scale financing in these markets. Although capital is increasingly becoming more accessible - especially from development financial institutions - there is still a gap when assessing opportunities in companies with limited track record. Most funding is currently going to large scale projects, while smaller companies have limited access to long term financing and working capital. As the market develops, debt needs are increasing. Companies need to optimize their capital structure by moving towards more tailor-made financing as off-balance sheet structured transactions via Special Purpose Vehicles (SPVs) directly linked to a pool of receivables. Furthermore, there is an increasing potential for securitization of receivables and other structured transactions. Not many financiers are familiar with these structures thus there is less funding competition in this segment.
  2. Market potential: The impact that access to reliable and clean electricity can have on households and SMEs in emerging markets is significant, resulting in development and growth. Related energy sub-sectors and technologies, such as distributed solar generation and storage, develop rapidly and open additional opportunities for investments and impact.
  3. Momentum: The movements behind impact investing and the SDGs are leading to increased private sector engagement in this market. The UN Sustainable Development Goal 7 “Ensure access to affordable, reliable, sustainable and modern energy for all” has refocused investor attention toward electrification, created an incentive for governments to push for clear guidance and regulation, and thus facilitated the growth of the market and the private sector engagement. Rapid growth has attracted commercial investors to PAYGO SHS companies with proven business models and clear pathways to profitability. The share of commercial funding in the off grid solar energy space has increased from 10% in 2010 – 2015 to 21% in 2016 – 2017 and is expected to further increase as the companies approach profitability.

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