The Energy Entrepreneurs Growth Fund, founded late 2019 and managed by Triple Jump, announced today it has made its first investments totalling $10mn in three off-grid solar providers in sub-Saharan Africa.
The off-grid solar companies were negatively impacted by Covid-19 and can be supported from a $6.6mn concessional loan from the African Development Bank (AfDB) to support these companies.
The patient and risk-tolerant capital provided by AfDB’s Sustainable Energy Fund for Africa will be blended with the capital of the Energy Entrepreneurs Growth Fund (EEGF) to provide loans on below-market terms to mitigate the negative impacts of the pandemic and support industry recovery.
EEGF aims to provide financing to early and growth-stage companies that provide access to energy in Sub-Saharan Africa. It announced today that it issued €2 million in financing to Baobab+, which distributes solar home systems in Western Africa and Madagascar, to expand its range of new products in Côte d’Ivoire.
Yellow, a Malawi-based solar energy start-up which mostly distributes and finances solar home systems to underserved households and micro-enterprises, received a total financing commitment of $4mn.
The third deal was with Redavia, a provider of solar energy solutions to commercial and industrial businesses in sub-Saharan Africa. At the end of August, EEGF paid the first part of a $3.7mn investment to Redavia.
Founded in 2019 by UK charity Shell Foundation and FMO, the Dutch Entrepreneurial Development Bank, EEGF is managed by Netherlands-based Triple Jump and advised by Persistent Energy, a climate venture builder. It has a target fund size of $120mn.
From the outset the EEGF has had differentiation hardwired into its DNA. The investments have been crafted to fill a gap in the region, Mark van Doesburgh, Investment Manager Sustainable Energy at Triple Jump told Impact Investor. Equity investors – particularly in the post-Covid period – have been notably reluctant to step in.
“”The EEGF can really play an important role by bridging that gap to equity investors who feel these companies are too early stage,” says van Doesburgh.
The fund aims to meet the changing needs of growing distributed renewable energy (DRE) companies working to achieve Sustainable Development Goal 7 (Ensuring access to affordable, reliable, sustainable, and modern energy for all) by 2030.
That challenge is particularly acute in Sub-Saharan Africa. An estimated 579 million people on the continent do not have access to electricity. Over the life of the fund, EEGF expects to reach 5.4 million households and businesses, and avoid the emission of 4.5 million tonnes of CO2.
“Where EEGF differs from other funds is that we provide the full range of financial instruments. Mezzanine debt is our main offer and we can also offer equity and senior debt as additional standalone or as parallel structured instruments to play to the companies’ needs.”
He notes that other investors take comfort from the fact that the fund is joining at the same time with patient mezzanine capital.
The fund also tries to set itself apart from the herd in targeting enterprises that lie beyond the dominant larger established players that have traditionally attracted funding from development finance institutions.
EEGF also provides so-called ‘engine room’ consultancy support to investees by addressing pain points in crucial operational areas. These consist of extensive, project-based interventions focusing on core areas of the usual critical operations and processes of off-grid businesses, including marketing, human resources, financial and IT systems and governance.
Grant programs for and later risk-averse investors in distributors of off-grid solar home systems have led to a situation whereby most investments have concentrated on a small number of established players. Newer, often innovative and lean second-generation companies still lack the tailored funding needed for growth.
“If you look at the balance sheets of the companies we’re investing in, it’s typically between $5mn to $20mn,” says Van Doesburgh. “These second-wave players focus on distribution. They leave the product design to third parties and buy off-the-shelf software. This unbundled business model and focused execution means they can reach profitability much quicker than the incumbent players.”
Second-generation companies often aim to expand into rural and remote geographies to reach the underserved clients, many of whom live on very low incomes. Their lean and specialised business models allow them to optimise operational efficiency and focus on scalability and data-driven decision-making – crucial aspects when expanding into remote areas to reach new customers, according to the EEFG.
“These early-stage companies often have similar issues with their IT backbone or setting up the financial management system. And that’s where we come in, sometimes pre-investment but always post-investment and ask, where can we help you to prepare for scale?” says van Doesburgh.
More need for equity and mezzanine debt
The pandemic has ensured there’s still significant concessional funding available for the sector. In June of this year the Rockefeller Foundation and Ikea Foundation joined forces to set up a $1bn platform to provide access to renewable energy for 1 billion people.
But that doesn’t negate the need to push more equity funding into the distributed renewable energy sector. “A lot of money will continue to go into the sector,” says van Doesburgh.
“Going forward, there will be less concessional funding. What’s really needed is more equity and the quasi-equity patient mezzanine debt, especially for the second-wave companies.”