Since the last MTR in 2016, funding to the sector has risen dramatically, driven by PAYGO SHS; the involvement of commercial funders has recently increased.

Total direct funding received by off-grid solar companies1
Millions USD (2012- 17)

As funding needs increase, there is an opportunity to address an ~USD 2.5 billion funding gap over the next five years; this is primarily to fund working capital needs

The ability of companies to absorb ever-increasing sums of capital is uncertain. To ensure effective use, they will require capacity building for finance teams and technical managers.

As the industry has matured, its use of funds has shifted towards working capital and business expansion.

Use of funds over time
Percentage of total funds raised (2012-17)

Commercial capital can help the market evolve towards financial sustainability, improving the long-term health of the sector.

Despite its increasing importance, commercial capital is not ready to be the primary source of sector funding; social funders remain important for encouraging commercial participation.

Blended transactions are currently the gateway for commercial capital; as the share of commercial funding increases, social capital may free up for other uses.

Equity investments continue to support a variety of consumer needs across the marketplace.

Total OGS equity investments from all sources over time
Millions USD; (2012-17)

Impact investors have funded the bulk of equity transactions; however, more recently, commercial investors have gained importance.

Investors with a commercial lens tend to look for specific attributes in the companies they invest in.

Key areas of focus for commercial equity investors
(collated from interviews)

Is the market overvalued?

Overvaluation
High working capital needs have pushed companies to be aggressive with equity fund raising
1 Historical lack of debt financing meant that companies
relied on a series of equity transactions raises to a
portion of their large working capital needs. VS
2 Repeated use of equity markets to raise capital (due to ever growing working capital needs) pushed valuations higher, as each subsequent round of equity funding was expected at a higher valuation

High prices justified
Current valuations may be justified as investors are not seeing the full value of the PAYGO business
1 Investors may not have properly valued the ability of companies to leverage the PAYGO technology and business model to reach a new cohort of customers
2 Investors may not have properly valued the size of the potential market given current focus on peri-urban consumers.
How do companies on the ground view commercial sources of equity? Has there really been a change in the type of equity investors interested in the sector?