SunFunder Beyond the Grid Fund

Climate Investing Track

Founded in 2012, SunFunder aims to drive a global energy transformation to provide universal access to energy and mitigate the environmental impacts of energy production and distribution to limit climate change.

Overview of SunFunder 

SunFunder is a financial intermediary in the off-grid solar industry, with specialized expertise and the most extensive lending track record in the sector. Founded in 2012, SunFunder aims to drive a global energy transformation to provide universal access to energy and mitigate the environmental impacts of energy production and distribution to limit climate change. SunFunder’s early work in energy access was focused on the provision of structured debt notes, issued by the Solar Empowerment Fund, and in 2017, they launched the $47m Beyond the Grid Fund, with the aim of providing diverse investor-types with exposure to the market, and larger scale funding solutions to solar companies. They are taking the lessons learned from the Beyond the Grid Fund forward in a new $85m Solar Energy Transformation Fund.

Motivation for the Beyond the Grid ("BTG") Fund

Around the world 2.5 billion people still lack access to reliable electricity. They often rely on costly, polluting, and dangerous kerosene or diesel to light their homes and businesses and have few good options for routine energy needs such as phone charging. Today’s investments in energy access are heavily skewed towards traditional coal-fired grid extensions, and at their current rate will leave one billion of the world’s poor without energy access by 2030. In the last few years, costs of solar PV technology have dropped significantly and there has been a proliferation of products tailored to off-grid communities. In May 2012, McKinsey projected a 40-50 GW off-grid solar market from 2012 to 2020, which is believed to represent a $250 billion financing opportunity. With this potential, solar businesses and entrepreneurs are stepping up to meet market demand. However, the market still suffers from a distinct lack of access to finance.  The investment objective of the Beyond the Grid Fund is to bridge that gap and provide off-grid solar companies with tailored debt capital financing in order to scale up.  

Structure of the Fund:

The fund is structured to meet the needs of both solar off-grid companies and debt investors across three tranches – Senior Debt, Mezzanine Debt and Junior Debt.

Assets Under Management (AUM)

USD 47 Million

Inception Year

First close: 2016

Geographic Focus

Sub-Saharan Africa, India, and the Pacific

Term

5-Year Fund

Impact Focus

Provide financing for the deployment of solar energy technology in off-grid and grid deficit communities and support the mitigation of CO2 emissions.

SDGs Targeted

#7: Affordable and Clean Energy

#8: Decent work and economic growth

#11: Sustainable cities and communities

#13: Climate action

#17: Partnerships for the Goals

Fund Capitalization

Three tranches -

Senior Debt: DFIs, Foundations, Private Investors

Mezzanine Debt: Foundations, HNWIs, Private Investor

Junior Debt: Foundations, Private Investors

Underlying Assets

Loans to solar companies (see below for more)

Size of Investments

Range: $100k to $5m

Return Expectations

Range of 4-7%

Blended Finance Elements

A key part of SunFunder’s strategy is to create tranches that meet the unique needs of different investor types. As SunFunder has evolved their strategy over the years and developed a track record in the space, their investor-base has also shifted. Prior to the Beyond the Grid Fund, SunFunder’s blending was done purely with different private investor types – based on the risk tolerance and return expectations of those investors, and where the investment sat in their broader portfolio. With BTG, the addition of public finance was made possible by private investors and foundations taking more risk-tolerant positions, lower in the capital stack.

Underlying Assets:

The end beneficiaries of the Beyond the Grid fund are households and individuals who are provided access to clean energy through investments in solar companies. There are approximately 1.2 billion people living without access to power grids, 97% of which are in Sub-Saharan Africa and Asia, and the Pacific. SunFunder targets three distinct customer types:

1. Pico-Solar Distributors and Suppliers (0-10W Solar) 

Typically, these companies are providing customers with power for lighting and mobile phone charging. SunFunder offers corporate loans for working capital and inventory, to support the growth of these companies, through expansion of distribution networks and PAYG models.

Example Investment : Greenlight Planet is a longstanding investee of SunFunder, providing access to solar lanterns and home systems to more than 27 million people worldwide, in more than 50 countries, with a concentration in India and East Africa. The target beneficiaries of Greenlight live off-grid, and rely on their products as their sole source of clean energy production.

2. Pay-as-you-go Solar Home Systems (0-1kW Solar) 

Solar home systems allow clients to generate sufficient energy to power multiple lights, as well as entertainment such as televisions, and other essential appliances. SunFunder provides PAYG receivables and structured finance to these companies in order to support regional expansion and consumer-financing of products.

Example Investment: SolarNow, active since 2011 and now with more than 40 branches in Uganda, sells modular solar home systems, offering a 24-month payment plan to end users. SunFunder created and provided a Structured Asset Finance Instrument (SAFI) in 2016 to provide an off-balance sheet solution to finance a growing book of receivables

3. Commercial and Industrial and Micro-Grids (1kW-1MW Solar) 

Commercial and industrial solar generation via microgrids and commercial-scale solar grids provides energy to multiple homes and businesses. SunFunder provides project and construction finance to catalyze the development of these projects in markets where access to that scale of capital is often hard to come by. 

Example Investment: Quest Works (‘QW’) is an Engineering, Procurement and Construction firm focused on turn-key delivery of real-estate and renewable energy projects in Nairobi, specifically solar rooftop systems.  QW solar customers are typically private, highly credible Kenyan businesses in the education, light industry and/or hospitality business. The solar PV systems are designed to reduce the customer’s overall dependence on the grid and reduce their monthly energy bill by 70%.

Types of Financing provided by the fund:

SunFunder provides three types of loans to companies operating in this market (see above for examples):

  1. Corporate loans for working capital and inventory
  2. Pay-as-you-go (PAYG) receivables and structured finance
  3. Project/construction finance

Impact Measurement and Management:

SunFunder reports on impact metrics for residential off-grid solar that have been standardized by industry group the Global Off-Grid Lighting Association (GOGLA). Two of the primary metrics show that 4.5m people have gained improved access to energy and 412,000 tonnes of CO2 emissions are mitigated annually due to SunFunder financing.

SunFunder’s approach is to focus on the specific impact that can be directly attributed to their loans; which means they do not count their customers’ wider impact enabled by other sources of financing.

The company has endorsed the new GOGLA Consumer Protection Code and, when the code is finalized, will require its portfolio companies to do so. More broadly, SunFunder encourages all of its borrowers to adhere to ESG practices that safeguard impacts and respect the rights of consumers.

Lessons Learned:

In structuring and going to market with the Beyond the Grid Fund, SunFunder 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 strategy must reflect the needs of different types of investors: Acknowledging that investor demand is not uniform, the funds should be tranched appropriately for various risk-return profiles and investor types. Concessionary or risk-tolerant capital providers can be essential to de-risking senior tranches for risk-averse investor types.
  2. Lack of catalytic capital: SunFunder’s biggest constraint to expansion has been a relative lack of first-loss capital at necessary pricing levels to deliver an overall risk-profile attractive to more senior investors.
Lessons Learned on the Energy Access Market:
  1. Match needs of energy companies: As early movers in the energy access space, SunFunder has gained a detailed understanding of the capital needs and challenges of solar companies operating in their target markets. Several characteristics set SunFunder apart from peers and have allowed them to access a high-quality portfolio of investments:
    1. Local team and origination capacity: SunFunder built Africa-based lending and credit teams. Its Nairobi office includes the COO, the CFO, investment officers, and financial analysts.  
    2. Specialist expertise: A key reason for the under-provision of debt financing for off-grid solar is the lack of sectoral expertise. SunFunder’s extensive experience enables it to do business more efficiently and make smarter decisions around risk.
    3. Speed: Lengthy due diligence processes at local banks and DFIs can be prohibitive for solar companies operating in fast-moving and expansion markets. SunFunder’s shorter, more targeted process, meets the need for agile finance felt by many of their investees.
    4. Agility: Provision of flexible financing, from junior debt to short term, small ticket regional deals, and local currency options is necessary.
    5. Structuring capacity: In-house counsel and a lending team with a range of structuring backgrounds (including syndications, ABS, lease and project finance) enables SunFunder to tailor loans to borrower needs. An example is the SAFI product which offers solar companies an SPV structure for receivables financing.
    6. Long-term lender: SunFunder is a relationship-oriented business and does not seek to enter into loans on a single transaction-only basis.

 

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