Kindly tell us about PFAN, and your work in the organization.
The Private Financing Advisory Network is a global network of climate and clean energy financing experts, which offers free business coaching and investment facilitation to entrepreneurs developing climate and clean energy projects in emerging markets.
Our goals are to build clean energy markets one business at a time, mitigate climate change and mobilize private investment in support of the Paris Agreement on Climate Change and the Sustainable Development Goals. Initiated by the UNFCCC and the Climate Technology Initiative (CTI) in 2006, PFAN is hosted jointly by the United Nations Industrial Development Organization (UNIDO) and the Renewable Energy and Energy Efficiency Partnership (REEEP).
1. What does climate finance mean and what are key organizations leading the work in Africa?
I’d define climate finance broadly as the application of finance and the mobilization of capital, from public and private sources, to finance initiatives or ventures, both for-profit and non-profit, that are tackling the challenges of climate change or taking advantage of some emerging opportunities as a result of climate change.
2. What do climate financing organizations look for companies they invest in?
Private financiers will be looking for what they’d be looking for from any good investment, in brief, the prospect of a good or reasonable return on their investment. On top of that, they will be specifically looking for the climate-related impact such as the amount of Green-house Gas (GHG) emissions mitigated.
Public sources of climate finance on the other hand may be more concerned about the scale of climate impact as opposed to returns given the nature of that type of financing. However, they may be very keen on the sustainability of the initiative or the activity.
3. What is PFAN’s perspective on climate finance trends in Africa?
Climate finance has been growing but is still far from meeting the need. You will find that majority of climate finance in Africa is sourced from the public sector, presenting a challenge as far as mobilizing private finance is concerned. This is partly related to the historical view of Africa as a high risk environment which also drives up the cost of the little private capital that is there.
Part of the challenge is simply unlocking existing capital. This is the problem PFAN is tackling from two perspectives:
1. Helping entrepreneurs/project developers develop bankable project proposals and increasing their investor readiness
2. Mitigating investor risk by developing quality pipeline that investors can consider reliably
The development of blended finance, where development finance is leveraged to crowd in private capital, is another way this is being tackled. The likes of Convergence Finance are spearheading this.
4. PFAN offers coaching and financing support to companies, among which is capacity building. What are the priorities for capacity building for climate finance?
PFAN specifically offers financial advisory services to climate-oriented projects and businesses to enable them be investor ready and subsequently through the fundraising process. Our main work involves making sure our beneficiaries have; a robust business model, required documents to raise capital, have sized (i.e., amount of capital to be raised) and structured their financing model (i.e. mix of debt and equity in an appropriate and optimal way).
5. What are the risks & opportunities to private sector investors in green projects?
There are a broad range of risks, depending on the nature of the project. For a power project such as a solar or hydro power plant being developed by an independent power producer, there are risks surrounding the technology, the tariff, off-take and so on. Such projects specifically structured as project financings and have a very specific approach to allocating risks.
For projects structured as traditional business operations, concerns lie on the revenue/demand-side of the equation and the supply side. For example, where there are raw materials or feedstocks involved, what is the certainty by which the project can guarantee their availability in the long term?
Common to both project and corporate finance is the risk associated with the entrepreneur or project developer. An investor will want to know their track record, long-term commitment to the project and capacity to bring it to fruition.
6. How has climate finance been impacted by Covid 19 pandemic?
There are several aspects we can look at:
1. Volume/availability of deal flow – the pandemic and the ensuing economic malaise had an impact on the development of new businesses across the board, and those that were operating struggled economically. This meant there were fewer ready opportunities for investors.
2. Valuations – with decline in business prospects in some sectors, there was a corresponding depression of valuations attributable to decreased demand for products. This in some instances meant investors could purchase assets at cheaper prices than normal.
3. Debt distress – Where businesses were holding debt and facing revenue shortfalls, their ability to service debt may have taken a hit. This obviously meant the lender received payments later than planned or in worst case the borrower defaulted. Debt providers may also have had to re-negotiate and re-structure many of their loans in light of the situation or as mandated by some governments as we saw in Kenya.
4. Effects on the investment process – in some cases, transactions in progress were hampered by the pandemic and measures such as lockdowns and travel restrictions. For example, an investor may have been unable to travel to conduct due diligence of a prospect’s work out in the field, thereby stretching out the transaction timeline until such a time when this was possible.
7. Please tell us about your work with SokoFresh in Kenya, why did you decide to partner with the company?
PFAN has been working with SokoFresh for some time now to advise on their fundraising journey. We are pleased that the team have kept their eyes on the ball and kept executing consistently, as validated by the fact that several financiers have backed the project. We are advising on their next capital raise.
8. What do you hope to achieve by supporting SokoFresh?
As with any other project we support, the aim is to help attract more private capital to climate-oriented ventures and thereby enable them to realize their visions and scale, and in so doing, play a part in the efforts against the detrimental effects of climate change and spearhead green growth. More specifically, climate adaptation in the agriculture sector has become a core focus for PFAN especially in Africa. As such, we are very keen on enabling SokoFresh’s innovative work in this area.
9. What can other initiatives learn from SokoFresh?
As mentioned earlier the project developer or entrepreneur is a key piece of the puzzle. Investors struggle to find high quality entrepreneurs – remember, the investor is primarily a provider of capital, they rely heavily on the entrepreneur as far as execution goes. The entrepreneur needs to know their business, know their market well and have an exceptional capacity and tenacity to execute for the long-term.