commercial finance as a - gogla · presentation: trends and future needs ... greenlight planet...
TRANSCRIPT
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
PollquestionPleasegotoyourBizzabo app
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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
PollquestionPleasegotoyourBizzabo app
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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