What more capital means for the off-grid energy sector
When Acumen set out to invest patient capital in off-grid energy, we believed that high-risk, long-term capital was required to build the market. A decade ago, only a handful of entrepreneurs and investors shared our conviction that businesses could be built and capital could be deployed to serve the needs of the poor. It was a small pond with even smaller fish.
Fast forward 10 years and the sector is thriving. We’re seeing scale at an increasingly rapid pace as more companies expand their customer base and more capital, from both big institutional lenders and more recently commercial equity investors, moves into the market. While $5 million was once seen as a large investment, headlines of companies raising more than $20 million are increasingly common and, what’s more, mergers and acquisitions activity are starting to happen.
Acumen’s energy portfolio is seeing the benefit of this trend, attracting capital at record speed. In the last quarter of 2017, four of our companies—SolarNow, Orb Energy, Husk Power Systems, and PEG—have raised $58 million. Each of these companies has pioneered technologies and business models, bringing off-grid energy solutions to low-income customers around the world.
SolarNow, which Acumen invested equity in in 2014, is a distributor and financier of solar home systems in Uganda and Kenya. The company raised $9 million in equity from Novastar and Shell and $6 million in debt from SunFunder. The money will be used to strengthen the company’s position in existing markets and expand into new markets. It will also allow the company to design and market more productive appliances.
Orb Energy, a provider of solar solutions in India and Kenya, has raised over $15 million in debt and equity from four investors including the Dutch development bank FMO and Overseas Private Investment Corporation. Acumen, under Acumen Capital Markets, first invested in Orb in 2011 and has stood by the company as it navigated India’s fast-changing regulatory environment and expanded from India into East Africa. Orb will use the capital to grow its financing offerings for small Indian enterprises and further expand its Kenya operations.
Husk Power Systems, a leading rural distributed utility company operating mini-grids in Asia and Africa, received a $20 million equity investment from Shell Technology Ventures LLC, Swedfund International and ENGIE Rassembleurs d’Energies. Acumen invested in Husk in 2010 when the company was operating biomass mini-grids for remote villages in rural India. Husk has since refined its business to adopt a solar-biomass hybrid model to better serve its customers. It is now positioned to accelerate its growth,tapping into what the International Energy Agency estimates as a $190 billion mini-grid market by 2030.
PEG Africa is a West African off-grid solar company and Acumen’s first investment under its Pioneer Energy Investment Initiative. Acumen participated in the company’s Series B equity raise and helped unlock $8 million in debt capital, an investment led by SunFunder to accelerate the company’s growth in Ghana and the Ivory Coast to reach 500,000 people.
The critical role of patient capital is underscored with these four announcements. In the last 10 years, Acumen has invested $22.1 million in our energy portfolio and, our companies have raised $162.5 million. This means for every $1 we invested, over $7.50 in follow-on capital has been attracted. Of equal importance, we see that for every $1 we invest, 4 lives have been impacted.
More follow-on capital isn’t just a flashy statistic for Acumen—it’s good news for the sector altogether. According to Dalberg and Lighting Global’s 2018 Off-Grid Solar Market Trends Report, fundraising in the off-grid sector has doubled annually over the last four years. Since 2012, $922 million has been raised in the off-grid sector. While growth is good, ensuring our companies have the time and space to listen to customers, refine their business models, and focus on long-term viability is core to Acumen’s investing.
With such large sums of money entering the market, some ask: why is patient capital still relevant? With rapid growth and the market still evolving, companies need every penny. Acumen’s capital is patient, operating on 8- to 10-year timescales and in some cases even longer, because we need to ensure our companies have the time to become financially sustainable and make a meaningful difference in the lives of their customers. With our support, companies aren’t forced to move up-market to higher income segments and abandon the poor because their investors require returns.
The off-grid energy market is growing rapidly, but the market still needs to be built, and Acumen can’t do it alone. While the sector might be on the rise, new pioneers still need capital and the poor need even more solutions. Low-income customers need incomes to rise. And for the off-grid market to thrive, companies need customers with more disposable income. Energy entrepreneurs focused on income-generating technologies and business models are part of the next wave that’s needed to move the sector forward. By supporting these companies with capital and more, the market can become more robust. Ultimately, we can accomplish what we set forth to do: provide choice to customers to lift themselves out of poverty.
Ten years ago, people questioned if patient capital could work. Could viable businesses be built to provide off-grid energy solutions to the poor? Could markets be created where they were non-existent or broken? So far, all signs point to yes.