CommercialFinanceasaCatalystforGrowth

Speakers• Moderator:PepBardouille,SeniorOperationsOfficer,IFC• Presentation:GauravGupta,PartnerandAsiaDirector,DalbergAdvisors

Speakers:• Najada Kumbuli,SeniorInvestmentOfficer,CalvertImpactCapital• RonMargalit,Principal,BlendedandImpactFinancing,LumosGlobal• EricNaivasha,GeneralManager,EnergyandEnvironment,EquityGroupFoundation• VaishnavSunil,ChiefFinancialOfficer,SolarHome

Agenda• Overview

• EquityInvestmentsPresentation:TrendsandfutureneedsInterview:VaishnavSunilandRonMargalit

• DebtInvestmentsPresentation:TrendsandfutureneedsInterview:Najada Kumbuli andEricNaivasha

• Finalthoughts

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CommercialfinanceasacatalystforgrowthintheOGSsector

InsightsfromtheLightingGlobalMarketTrendsReport2018

January2018

7

Agenda

Overview (1:30– 1:40)§ Welcomeandintroductions§ Overview

EquityInvestments(1:40– 2:15)§ Presentation:Trendsandfutureneeds(10mins)§ Paneldiscussion(25mins)

DebtInvestments(2:15– 2:50)§ Presentation:Trendsandfutureneeds(10mins)§ Paneldiscussion(25mins)

Finalthoughts(2:50– 3:00)

Picturesource

Overview

9

SincethelastMTRin2016,fundingtothesectorhasrisendramatically,drivenbyPAYGOSHS;theinvolvementofcommercialfundershasrecentlyincreased

Note:(1)DataonthesizeoftransactionsrepresentsamixofpublicdataandDalberg’sbestestimateswherethequantumoffundsinatransactionwasnotmadepubliclyavailable.Source:GOGLA2018DealsDatabase

TotalinvestmentsbyinvestortypeMillionsUSD(2012- 17)

25%

42%

22%

10%

2012-15

3%

21%

2%12%

2016-17

602

27%

37%321

UnknownFoundations

CommercialImpact&crowdfunding

DFI&othergovernment

YTDDec8,2017

44%

69%

2014

13% 13%

2013 2016

33%

2015

9%

2012

31%

87%87% 91%

56%67%

Non- PAYGO PAYGO

Fundingflowsbybusinessmodel%oftotalfundingraised(2012- 17)

Whilecommercialinvestmentherereferstopurelyprofit-drivenentities(e.g.localbanks,privateequityfirms,strategicindustryplayers),itshouldbenotedthatimpactinvestorsandDFIsareincreasinglyprovidingfundson

commercialtermsaswell

10

Themajorityoffundinginthepast5yearshasgoneto10companies

Note:(1)DataonthesizeoftransactionsrepresentsamixofpublicdataandDalberg’sbestestimateswherethequantumoffundsinatransactionwasnotmadepubliclyavailable.Source:GOGLA2018DealsDatabase

10 30 100 110 18020 1901509050 80 130 20012070 170160140600 40

Other

BBOXX

d.light

GreenlightPlanet

LumosGlobal

Kingo

M-KOPA

OffGridElectric

SimpaNetworks

Fenixinternational

Mobisol

Totaldirectfundingreceivedbyoff-gridsolarcompanies1MillionsUSD(2012- 17)

11

Asfundingneedsincrease,thereisanopportunitytoaddressan~USD2.5billionfundinggapoverthenextfiveyears;thisisprimarilytofundworkingcapitalneeds

Theabilityofcompaniestoabsorbever-increasingsumsofcapitalisuncertain.Toensureeffectiveuse,theywillrequirecapacitybuildingforfinanceteamsandtechnicalmanagers

Source:GOGLA2018DealsDatabase;DalbergOGS2017-22Financingneedsmodel

$1.1– 1.3

Expectedexternalfundingfrom

publiclyannouncedsources

$5.1– 5.7

$2.4– 2.6

$1.6– 1.8

InternalfundingTotalforecastedfundingneeds

Newexternalfundingtoberaised

TotalforecastedfundingneedsandexpectedsourcesofcapitalBillionsUSD(2017-2022)

9%

Consumerloanreceivables

Capex

Inventory 25%

66%

Forecasteduseoffundsbycompanies%oftotalfundingneeded(2017-22)

12

Astheindustryhasmatured,itsuseoffundshasshiftedtowardsworkingcapitalandbusinessexpansion

Note:Useoffundswasdeterminedeitherthroughintervieworbyreviewingthepubliclyannouncedstateduseoffundsatthetimeoffundraisingthroughcorporatenewsreleasesorotherpubliclyavailablenewssources.DataonthesizeoftransactionsrepresentsamixofpublicdataandDalberg’sbestestimateswherethequantumoffundsinatransactionwasnotmadepubliclyavailable.Source:GOGLA2018DealsDatabase

UseoffundsovertimePercentageoftotalfundsraised(2012-17)

42%

80%

58%

31% 41%

45%25%

31% 14%

9%

42%41%

23% 25%36%

0%0%12%

0%12% 0% 13%

0%

0%

2016

7%

0%

2012

2% 1%5%

YTDDec8,2017

5%

2014

0% 0%

0%

2013

0%

2015

2%

0%

Workingcapitalincl.financingreceivables Businesssetup&proofofconceptMarketentry&productrefinementFurtherbusiness(newgeography,product,acqusitionetc.)+refinancingandopsScaleupbusiness

Ascompaniesmature,theirfundingneedsincrease.Commercialcapitaliswellsuitedtomeettheseneedsduetofewerconstraintsonfunders

13

Commercialcapitalcanhelpthemarketevolvetowardsfinancialsustainability,improvingthelong-termhealthofthesector

FocusonprofitabilityInternationalbestpractices Freeupconcessionarycapital

Commercialfundersareoftendeeplyinvolvedintheirinvestment

companies,forexamplebysittingonboards,helpingmanagementtodevelopstrategiesandfocustheir

operations

Commercialfundersoftenbringwiththembestpracticesandexperiencesfromotherindustriesfasttracking

OGSsectordevelopment

Managementbeginstoshifttheirfocustowardsmeetingfinancialgoalsandmetrics,imbuingacultureoflongtermsustainabilityinthe

company

Withthelargercompaniesincreasinglysupportedby

commercialfunders,concessionaryfundersarefreeduptoredeploy

capital.

Betteroversight

14

Despiteitsincreasingimportance,commercialcapitalisnotreadytobetheprimarysourceofsectorfunding;socialfundersremainimportantforencouragingcommercialparticipation

Leveragesectoralexperiencetohelpcommercialfundersbridgeknowledgegaps

Createawarenessforandsourcecommerciallyprofitableopportunitiesintheimpactsectors

Providetechnicalassistancetoinvestorsunfamiliarwithinvestmentconditionsinfrontiermarkets

Areasofsupportfromsocialinvestors

“CommercialfundingforOGSprojectremainslimited,buttheOGSmarketismaturingquicklywhichshouldallowfor

theadoptionofcommercialfundingwithinthenext2years“

- DFI

Supportecosystemviacreationofpublicgoodsthatde-riskinvestments(e.g.commonindustrystandards)

“Itseemslikecommercialbanksarebeginningtoshowinterest.[DFIs]canhelptosupportthis.”

- DFI

“Theindustrystartedwithsocialfundersandmaytransitiontocommercialfunders.Theindustryisinthe

processofthistransition(resultinginblendedtransactions)”

- LocalCommercialBank

15

Blendedtransactionsarecurrentlythegatewayforcommercialcapital;astheshareofcommercialfundingincreases,socialcapitalmayfreeupforotheruses

Roleofdirectfundingfromsociallyfocusedinvestors

“Lastmilereachisachallengeforthesectorbecauseitisnotyetcommerciallyviable,andmayresultinbifurcationofcommercialfocusedplayers,andmoreimpact-focusedplayers.“

- DFI

“Forthetimebeing,you’lllikelyfindahybridfinancingstructurewhereDFIsinvestalongsidecommercialinvestorsuntilthereisenoughofa

trackrecordinplace”- Localcommerciallender

“DFIsstillhavespacetowork,especiallyonthedebtside,itwouldbegreatfortheDFItotake

amoreactiveroleinsupportthenextgenerationoffirms.“

- FamilyOffice

Illustrativeexampleofblendedfinancetransactionin2017

Commerciallender(USD9Mcommitment)

DFIco-investment(USD46Mcommitment)

USD55Msyndicatedloan

De-riskcommercialfinance

Fundlast-milereach

Supportinnovative,youngercompanies

https://pxhere.com/en/photo/1346014

Equity

17

Equityinvestmentscontinuetosupportavarietyofconsumerneedsacrossthemarketplace

Source:Mobisol;GenerationInvestmentManagement;NovastarVentures;

2012 2013 2014 2015 2016 2017

150

200

50

0

100

TotalOGSequityinvestmentsfromallsourcesovertimeMillionsUSD;(2012-17)

In2016,InvestecandagroupofDFIsmadeanequityinvestmentinMobisolto“acceleratethecompany’sgrowthinits

existingmarketsandtosupportitsexpansionintonewmarketsinAfrica”

In2015,GenerationInvestmentManagementmadeaUSD19MMinvestmentintoMKOPAto“furtherexpand thecompany’s management

team, productrangeandinternationaloperations”

In2014,AcumenandNovastarVenturesinvestedEUR2MMintoSolarNow to

supportthescalingofrenewableenergyassetsandfinance

In2017,Ubis CapitalprovidesUSD625Kin

seedfundingtoSolarHome

18

Impactinvestorshavefundedthebulkofequitytransactions;however,morerecently,commercialinvestorshavegainedimportance

Note:DataonthesizeoftransactionsrepresentsamixofpublicdataandDalberg’sbestestimateswerethequantumoffunds in atransactionwasnotmadepubliclyavailable.Source:GOGLA2018DealsDatabase;DalbergOGS2017-22Financingneedsmodel

914

2012

27%

11%

2013

15%

10%

60% 16%

76%

4% 59%

2014 2015

160

9%

44

112

13%46%

6%5%

2016

43%

2017

101

Impact&crowdfundingFoundationsCommercial DFI&othergovernment

BreakdownofequityinvestmentsbyfundertypeovertimeMillionUSD(2012-17)

2017-2022

1.3

2012-2016

0.4

ChangeinOGSequityinvestments&needsovertimeBillions,USD(2012-16;2017-22)

Equityrepresented~30%ofprojectedcapitalneedsfrom2017-2022,downfrom~56%from

2012-16

(Actual) (Forecastedneed)

19

Investorswithacommerciallenstendtolookforspecificattributesinthecompaniestheyinvestin

e.g.Successfulexpansiontosecondmarket

Keyareasoffocusforcommercialequityinvestors(collatedfrominterviews)

“Differentiatedtechnologyandsustainedabilitytoscaleisakeyaspectofgettingfundingfrom

thesecommercialsources”– Privateequityinvestor

Owncustomerrelationship

Ownproprietary,innovativetechnology

e.g.Sustainedsalesgrowthandvolumesthatsignifytheability

Provenabilitytoscale

e.g.R&Dandpatentsonappliances

e.g.Controldistributionandcustomertouchpoints

Canabsorbasignificant(USD10M)investment

20

Isthemarketovervalued?

VS

Highworkingcapitalneedshavepushedcompaniestobeaggressivewithequityfundraising

Overvaluation Highpricesjustified

CurrentvaluationsmaybejustifiedasinvestorsarenotseeingthefullvalueofthePAYGObusiness

“Valuationsarehighbutitshardtosaybyhowmuch.Inprivatemarkets,thereisalwaysadearthofdataand"true"

valueiswhatpeoplearewillingtopay.“

“Companiesarenotovervalued,wejustdon’tknowhowtovaluethem”

1

2

1

2

Historicallackofdebtfinancingmeantthatcompaniesreliedonaseriesofequitytransactionsraisestoaportionoftheirlargeworkingcapitalneeds.

Repeateduseofequitymarketstoraisecapital(duetoevergrowingworkingcapitalneeds)pushedvaluationshigher,aseachsubsequentroundofequityfundingwasexpectedatahighervaluation

InvestorsmaynothaveproperlyvaluedtheabilityofcompaniestoleveragethePAYGOtechnologyandbusinessmodeltoreachanewcohortofcustomers

Investorsmaynothaveproperlyvaluedthesizeofthepotentialmarketgivencurrentfocusonperi-urbanconsumers.

PollquestionResults

Interview

• Howdocompaniesonthegroundviewcommercialsourcesofequity?Hastherereallybeenachangeinthetypeofequityinvestorsinterestedinthesector?

• RonMargalit,Principal,BlendedandImpactFinancing,LumosGlobal• VaishnavSunil,ChiefFinancialOfficer,SolarHome

https://pxhere.com/en/photo/827724

Debt

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25

Theshareofdebthasincreasedovertime;itisexpectedtoformthebulkoffuturefundingneeds

Commercialdebtsourcessuchaslocalcommercialbanksandoff-balancesheetassetstructurescanprovidethevolumesofdebtrequiredtomeetforecastedneeds

Note:DataonthesizeoftransactionsrepresentsamixofpublicdataandDalberg’sbestestimateswherethequantumoffundsinatransactionwasnotmadepubliclyavailable.Source:GOGLA2018DealsDatabase;DalbergOGS2017-22Financingneedsmodel

32% 40% 40%65%

68%50%

59%56% 56%

30%

12%14%

38%18%

4%

2017-22

5%

2016

5%

2014 20152012 2013

8%

DebtEquityGrant

Breakdownoffundraisedbyinstrument%oftotalfundsraised(2012-2016;2017-22)

2017-2022

2.6– 2.8

2012-2016

0.2

Changeinthequantumofdebtraisedandneeded,overtimeBillionsUSD(2012-16;2017-22)

(Actual) (Forecastedneed)

Forecast

DFIsandimpactinvestorhaveprovided~79%of

historicaldebtneeds,withcommerciallendersproviding~9%.But,

commercialfundersareexpectedtobemoreactive

asnewdebtfundingopportunitiespresent

themselves

26

ThisdebtneedhasbeendrivenbyworkingcapitalfundingrequirementsofPAYGOcompanies;astheygrow,theywillneedmoreexternaldebt

PAYGOcompaniesthataregrowingrapidlymaycontinuetorelyonexternalfundingsourcesfor8– 15yearsbeforefinancingneedsleveloff

Note:CashflowsforDESCOsprovidingathree-yearconsumerfinancingfor90percentand50percentofSHSpurchaseprice(model withcostofgoodssoldat 33percentofrevenueandoperatingexpensesat 15percentofrevenue)(source:ThereisSuchaThingasTooMuch,TooFast:Avoiding‘MismatchedExpectations’inOff-GridEnergyInvestingbyPepukayeBardouille /DanielShepherd/Gianmaria Vanzulli)

PAYGOcompaniesactasfinancialintermediaries NeedforexternalfinancingbyproportionofsaleswhicharefinancedthroughthePAYGOmodel(50%v.90%financed)

1

2

3

4

EachPAYGOsalecreatesaconsumerloan,whichneedsfinancing

Consumerloanswillbefundedfromexternalsources,astherearenotinternalfundingsources(e.g.depositsinabank)

Short-termworkingcapitalloansarethemostappropriatecapitalsource

Thefasterthegrowth,thegreaterthefundingrequired

27

CommerciallendinghasbeenlimitedduetoconservatismandunfamiliaritywithOGS;recentdevelopmentsthathaveunlockedthevalueofconsumerreceivablesmayhavechangedthis

Stronginternalfinanceteamscanboostthevalueofacompany'sportfolioofconsumerloans,enablingmorecommercialloans

Keyfactorsunderlyinglimitedcommerciallending

“Localbanksarereadytofinanceinfrastructure,buttheyarereluctanttofinanceconsumerssalesbusinessmodels.Thisoff-gridindustryisclosertoasalesbusinessmodelthananinfrastructureone”

– Impactinvestor

“Theindustryisnewanduntilit’sreadybankswon’tlend.Asthetrackrecordbuildsandhistoricalnumbersbecomeprovedouttheywillparticipatemore”

– Privateequityinvestor

Commercialbankswon’tlendtocompanieswithlimitedtrackrecord

OGSlendingoftenfellunderinfrastructuregroupsunfamiliarwithOGSneeds

Leveragingmobilepaymentsplatformstotrackconsumerloanrepaymentpatterns

Developingriskratingmodelstobettertrackrisks

“…theydidn’tuseratiosbasedonfinancialstatements.Rather,wegotunfetteredaccesstotheirinternalsystemsincludingtheirmobilemoneypaymentsaccountstoensurethatfundswereindeedsweptforloanrepayment.”

-Localcommerciallender

Interventionshelpfulatsupportinggreaterlending

“Thebankreliesontheborrowertousetheirsystemandwillreviewtheborrower’screditratingsystemtoensurethatitmakesense.”

-Localcommerciallender

28

Asaresult,bankshaveincreasedtheirlendingtothesector;inselectmarkets,2017representedamaterialjumpinlocalbanksupport

Thisincreaseinlendingshouldbeviewedasasignalofbankinterestanditspotential,ratherthantheestablishmentofbankdebtasacommonsourceofcapitalfortheindustry

Note:Fundingcapturedviathedatabaseisbasedoninterviewsandpubliclyannounceddeals,andmaythereforebeunexhaustive.Source:GOGLA2018DealsDatabase

14

21

2012-2016 2017

Lendingviacommercialbanksovertime(notexhaustive)MillionsUSD(2012–17)

Recipientsofcommercialbankdebthavebeen

establishedEastAfricancompanies.Banklendinghasnotspreadtoother

geographies.

CommercialBankofAfricaloantoM-KOPA

Closing 2014

Value USD10Mn (Ksh 860Mn)

Structure Commercial-gradesyndicatedrevolvingdebtfacility;securedbyM-PESAreceivables

Purpose Workingcapital

Participants CommercialBankofAfrica,BillandMelindaGatesFoundation,LGTVenturePhilanthropy,Netri Foundationandothers

BanquepopularduRwanda loantoBBOXX

Closing 2017

Value USD2Mn

Structure Standalone,drawdownininlocalcurrency

Purpose ScaleupinRwanda

Participants BanquepopularduRwanda

Examplesoflocalbanklending

29

LendingfromlocalbanksbringsamyriadofbenefitstotheOGSsector

Benefitsoflocalbanklending

Abilitytoprovidelocalcurrencyfunding:Aslocalbanksarefundedbylocaldeposits,theyarethelogicalprovidersoflocalcurrencyfinancinghelpingtomitigateforexrisks.

Strongeron-the-groundknowledge:Frequentandfrankcommunicationbetweenbank/borrowerbuildstrust.Furthermore,localbanksbetterunderstandmarketrisk.

Lesssensitivetoglobalfinancialfactors:Foreigninvestorsmaybeinfluencedbyhomemarkets.Localcapitalistypicallycommittedtothelocaleconomy;theyarethereforemorestable

Betterpositionedtosupportindigenousbusinesses:Languagebarriersandanunfamiliaritywithinternationalfunderslimitthefunding.Localbanksareconnectedwiththecommunity.

“Mostofthedebtfundingismadeinhardcurrency,exposingtheborrowertoforexis.Topreventforexrisk,itwouldbepreferablefor

localcommercialbankstoprovidelocalcurrencyfunding.”-LoicPerret,Proparco

“Thereisbenefittosittingintheroomwiththeclientandhavingaconversation.Itdoesn’tworkaswelloverthephone.”

-Localcommercialbank

“Wewanttofundlocalentrepreneursinthisspacebutdon’tknowhowtoreachthem,astheyregularlydon’tspeakEnglishorhavethesamenetworksasothershave.Localintermediariesareneeded.”

-SaskiaWerther,DoenFoundation

30

Somecompaniesarealsousingoff-balancesheetfinancingduetoitsabilitytoscalerapidlyalongsidecorporategrowth;thismaybeanopportunityforcommercialfunders

Simplifybalancesheet Highlyscalable Mayallowaccesstointernationalmarkets

Specialpurposevehicle(SPV)Operator Investor

ConsumerOperatorcontinuestomanageconsumerrelationship

Payments

Loan

P+I

Cash

Consumerreceivables

Companiessimplifyfundraisingbyavoidingissuessuchasintercreditoragreements

ReceivablescanbeputintoSPVsonanongoingbasisallowforfundingtogrowwithcompanydevelopment

Tranching ofrisksmayeventuallyallowaccesstoglobalfinancialmarketssimilartootherconsumerloans.

IllustrativemodelofOGSPAYGOoff-balancesheettransaction

Benefitsofoff-balancesheettransactions

31

Whilecommerciallendingstillrequiressupportfromsocialfunders,ecosystemsupportsuchasstandardizedmetricscouldhelpthetransitiontowardsmorestandalonecommercialloans

Standardizedmetricsimprovetransparency

“Withstandardriskmetrics,Youdon’tneedtolookattheriskofthecompanies.Youcanreviewthecreditratingandunderstandtheriskofftheinvestment”

– Impactinvestor

“TheriskremainsthatlendersdonotknowyetiftheirportfolioofsecuritizedassetscouldstillbeoperatedincaseaDESCOgoesintobankruptcy.Thesecuritizedstructureisoff-balancesheet,sointheoryitshouldbebankruptcyremote,butisitreally?”

– DavidtenKroode,Oikocredit

Clearerunderstandingonbankruptcyremoteness

clarifiesrisks

Socialinvestorsupporttocommerciallenders Potentialfutureecosystemsupport

Co-lending fromlargerinstitutionsprovidespositivemarketsignalsandalleviatesinternalconcerns

Pioneeringfinancialstructures,developedbysocialinvestors,opendoorstofuturecommercialfunders(eg:off-balancesheetstructures)

Technicalassistancereducescreditrisk(whenprovidedtocompanies)andbuildsanalyticalskillsfordeals(whenprovidedtolenders)

PollquestionResults

Interview

• Howdoimpactcapitalandcommercialcapitalinteractintheoff-gridsolarsector?• Areweonatrajectorytowardsmorecommercialcapitalbeingdeployedinthesector– anddowewanttobeonthattrajectory?

• Najada Kumbuli,SeniorInvestmentOfficer,CalvertImpactCapital• EricNaivasha,GeneralManager,EnergyandEnvironment,EquityGroupFoundation

Discussion