Growth Capital for Off-grid Lighting Companies: Framework for Developing the IFC Lighting Africa Access to Finance (A2

1. Growth Capital for Off-grid Lighting Companies:Framework for Developing the IFC Lighting Africa Access to Finance (A2F) Program Presentation by: John MacLean, Energy Efficiency Finance Corporation, USA Financial Advisor to IFC jmaclean@eefinance.net

2. IFC Lighting Africa Access to Finance Program • Being designed, new phase of Lighting Africa services • Assess financing needs of companies along the value chain • Map & understand interested financial institutions (FIs) • social investors, VC investors, commercial FIs & banks, MFIs & others • Facilitate financing to meet needs of industry: main goal • Design & organize new financial products & facilities to fill financing gaps; support commercial FIs to offer them • Develop investments for IFC, range of possible structures • Mobilize & make strategic use of concessional finance • Leverage, commercial structures, pathway to commercialization • Provide advisory services, pre- & post-investment • Goal today: present “strawman” concepts for consultation

3. Off-Grid Lighting Value Chain Up Stream • International Manufacturers • International Lighting Firms & Product Designers • Multi-Country Wholesalers Down Stream Country Based Distributors • Country based mfgs, assemblers, system integrators • Multi-Country • Distributors • Dealers, franchisees & sales agents • End-user finance partners End-Users

4. Financing Needs of Off-grid Lighting Companies • Corporate equity, several uses of proceeds , including : • Expansion, e.g., new country operations & staffing • Manufacturing working capital • New own manufacturing facilities • Working capital loans • Trade finance • Inventory/stocking finance • Dealer/distributor finance • Plant & equipment finance • End-user Finance, to offer to or arrange for customers

5. Typical Profile of “Upstream” Investees A. International Off-grid Lighting Manufacturing Firms: • Own product designs with outsourced & some own manufacturing • Multi-country distribution operations, through own distributors & partners • Examples: D-Light, SunTransfer, Greenlight Planet, Barefoot , Thrive B. Multi-country Distributors: • Various distribution strategies & channels; own distribution channels common • Examples: Great Lakes Energy, Sunlabob

6. Due Diligence Issues & Investment Challenges • Investment size requirements often very low • No IP or lack of strong IP; low barriers to entry; branding • Distribution strategies & costs • Sustainable competitive advantages; competition from large lighting companies • Working capital cycle; sizing of working capital needs • Margin analysis • Valuation analysis challenges • Pathway to scale up; investor exists • Investee dilution concerns; balance debt & equity ----------------------------------------- • Technology, product quality, multi-functionality • Affordability and end-user ability to pay; addressable markets • Management

7. International Funds Addressing Off-Grid Lighting • Donor-based investment funds: REACT (UK DfID), Global Nature Fund • Social Investment Funds: Acumen, responsAbility, E+Co, GroFin, Shell Foundation Fund, UNEP AREED Fund, Grassroots Business Fund, d.o.b. foundation • Social Lenders: Tridos, Oikocredit

8. International Funds, Threshold Terms • Donor-based investment funds • grants of equity & 0% loans; $250,000 minimum common • co-finance up to 50% • seeking leverage & development impact • commercial type due diligence; will consider earlier stage firms • Social Investment Funds: • preferred equity; convertible debt ; debt with equity kickers • Significant minority shares; co-finance up to 25-50% • Yield targets, 10-15% typical, can be lower • Investment minimums $250-500,000 • Development (not seed) stage companies; proven technology, management & addressable markets; pathway to scale up defined

9. A2F Concept 1: Finance Facilitation • Information base of lighting companies: select for assessment • Information base of interested, qualified investor & finance sources, equity and debt • Appetites, capacities, criteria & profile, terms • Recruit commercial FIs to this market • Pre-investment advisory services • Business planning, financial projections, due diligence assessments • Investment structuring, origination, negotiation • Product quality certification • Present qualified company information to investors & FIs • Opportunities for IFC finance • Potential to blend concessional co-finance • One-off, via a facility, commit to FI and/or to lighting company

10. A2F Concept 2: Multi-Investor Corporate Finance Facility • Organize interested investors into new Facility or Fund • Opportunity for diversification • Opportunity for deal flow • Can use range of investment structures: preferred equity, convertible debt, subordinated debt • Could consider multi-investor loan facility • Blend concessional co-finance, mobilized by IFC • e.g., subordinated low to 0% financing • Investors can invest via a new fund/facility or in parallel • IFC L.A. focuses on identification, due diligence & origination • Management, governance & organization issues associated with new fund

11. A2F Concept 3: Import, Stocking & Inventory Working Capital Loan Facility • Needs amongst many companies: bottleneck for growth • Immediate opportunity to increase sales & margins • Sizing, 60-90 days turnover; map working capital cycle • Security: inventory product, assignment of receivables • Work with lighting companies’ existing lenders or new lender • Organize single multi-country loan facility or multiple facilities • Offer risk sharing to lenders; concessional $ in 1st loss position • Loan loss reserves, easiest to implement • Partial credit guarantee; IFC as guarantor • Guarantee reserves, working with another guarantor • Structure, risk sharing formula, event of loss, pricing • Leverage ratios & financial performance metrics to increase them • Could provide RSF to lighting companies, who then shop for lender

12. A2F Concept 3a: Loan Guarantee Program • Work with local commercial bank lenders • Single lender, multi-national; choose a Pan African bank • Single lender per country • Let lighting companies promote their lenders • Focus on working capital loans; term loans possible, too • Offer risk sharing • Partial credit guarantees; first loss guarantees possible • Define pathway to commercialization; financial performance metrics • IFC as guarantor; plenty of precedents • Use donor/concessional funds as guarantee reserves • OR, consider other/existing guarantee agencies • Offer advisory services: Qualify lighting companies as borrowers

13. A2F Concept 4: End-user Finance via MFIs, channeled via Upstream Companies • Set up Wholesale loan facilities to MFIs • Asset/Liability matching for MFI • Create wholesale loan facility with Pan-African bank or arrange wholesale loans with individual Fis country-by-country • Provide risk sharing facilities • Loan loss reserves well suited, covering both retail & wholesale lending risks; can represent good leverage of concessional funds • Portfolio approach to credit structure • Could provide these resources to international & country-based wholesale lenders OR to lighting companies who then shop for FI/MFI partners • Advisory services to structure & set up facilities

14. Discussion Topics • What are the priority finance needs of lighting companies? • Which program methods are easiest, quickest to implement? • What’s missing from this framework? • Response to A2F program concepts • Which are most interesting for lighting companies? • Which are most interesting for investors and FIs? • Other ideas & hybrids • Structure of risk sharing facilities • Advisory service needs • Role of carbon finance

15. IFC/GEF E.E. Finance Guarantee Program • Key Features: • $15 million in GEF reserves, up to $75 million IFC investment; • total guarantee capacity = $90M • Partial 50% guarantee; subordinated recovery, pari passu, first loss & portfolio guarantees used • Operating in 6 E. Europe countries • TA provided to all parties to prepare projects & build capacities • Financial products w/guarantee developed for industry, SMEs, municipalities, hospitals, district heating, cogen & thermal plants, lending to ESCOs, multi-family & single family housing; small scale bio-mass & wind I.F.C. Grant $ GEF GEF $ Guarantee Facility Agreement Transaction Guarantee LOCAL FINANCIAL INSTITUTIONs EE Project Loans Leasing Co. ESCO End-user Lease Energy Services Agreement End-user End-user

16. WB/GEF China REDP

17. UNDP/GEF SHS Direct Sales Finance Scheme, Palawan CRREE/UNDP GEF Development Bank of Philippines Loss Reserve Fund Wholesale Lender (potential) Escrow Agent Co-fund LRF T.A. to all parties/program start-up Assignment of Loss coverage co-fund LRF Loss coverage Vendor Finance Agreement SSPC: SHS Vendor Wholesale Lending & Re-financing Cooperative Bank of Palawan Sell & Install SHS Training SHS loans & collections Loan pmts Local SHS Technicians … SHS Maintenance Households

18. Diagram 1: Ghana, Energy Equipment End-user Finance Program Concept UNEP LRF Escrow Agreement Int’l Dvl. Wholesale lender Escrow Agent* LRF funding AREED II Implementation Agrmnt & funding Recourse loan LRF Escrow Agreement KITE Wholesale Lender: UBA TA to all parties Wholesale Loan MFIs: FASL, GSCSA**… Enterprises/Vendors … … Vendor Finance Program Agrmnt Loans Equipment & services End-Users/Borrowers NOTES: * Current candidate is Ghana Commercial Bank. **Multiple susu collectors, organized by GSCSA

19. Payroll Deduction or Ag Crop Payment Equipment Finance Scheme Equipment/appliance providers energy equipment sales Equipment promotion program agreement Labor or crops End-users/ Employees Payroll or crop payment Employer authorization for payroll/payment deduction Payroll deduction program agreement equipment or appliance loans Financial institution Loss reserve fund & TA, as needed SSRE Program Donor

20. IFC Investment Tools & Instruments • Specialized IFC Funds for corporate equity investment • Clean Tech Fund • Other VC & private equity fund investments • Follow on loans; direct & syndicated • Investments via Financial institutions • Credit lines for FIs, leasing companies, MFIs • Partial credit guarantees, subordinated recovery guarantees, first loss & portfolio guarantees, other risk sharing facilities • Trade finance facilities • Concessional & donor funds • Blend with IFC investments & other co-finance partners in commercial finance structures • first loss reserves for guarantees & loan loss reserves for risk sharing • Subordinated debt co-finance • Advisory services: in-kind & co-fund