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Emerging markets must attract much more finance for climate tech

Boutique investment bank DAI Magister suggests donor funds could catalyse private equity and debt investment in climate tech, the big theme of COP27.

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Photo: iStock

The German government has turned back to its coal-fired power stations after the loss of Russian gas, but that is a short-term response to energy insecurity.

Solar and wind power are now confirmed as the cheapest form of electricity and, along with tidal and hydrogen, renewables will comprise an increasing share of power generation in developed economies in the years ahead.

However, achieving net zero requires emerging-market economies as well as developed to make big investments in energy transition and climate adaptation. The most pressing topic at COP27 in Sharm El-Sheikh next month will be how to make this happen.

In September, Euromoney reported on a series of big private capital raisings by clean energy, battery and carbon-capture companies in Europe, ranging from $500 million to $1 billion.

As delegates arrive in Egypt, their task is to mobilize similar sums in Africa and across emerging markets where, even for well-established firms, financing deals remain small.

In March 2022, M-Kopa, a fintech founded in Kenya in 2011 to enable digital micro-payments from underbanked consumers for services such as off-grid solar lighting and other solar-powered appliance such as fridges, raised a $75 million growth equity round. Generation Investment Management and Broadscale Group led this, while previous investors including CDC Group and Lightrock also participated, along with new investors LocalGlobe and Hepco Capital Management.

Jesse Moore, co-founder and chief executive of M-Kopa, says that after 10 years, the company is now providing two million customers with the ability to pay for solar power. “But there are still millions of people across the continent that are stuck with limited economic options," Moore adds. "With this funding, we will expand to more markets across Africa and scale to over 10 million customers in the next few years.”

Climate tech subsectors

Boutique investment bank DAI Magister was exclusive financial adviser to M-Kopa on the financing, which takes the total M-Kopa has raised to $190 million.

The firm previously worked with Twiga Foods, a Kenya based company using platform technology to connect small independent food retailers with farmers to make food distribution more efficient, on a $35 million investment from Goldman Sachs in 2019.

Last year, $100 billion of venture capital and growth equity was allocated to climate tech: that’s 200% up on the year before. Meanwhile broad technology raised $700 billion
Marc Deschamps, DAI Magister
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Ahead of COP27, Marc Deschamps, co-head of DAI Magister, shares some thoughts on the current state of funding for climate tech companies, the particular challenges in emerging markets and the potential for companies to move beyond expensive private equity to debt funding.

Both Deschamps and the firm’s other co-head, Victor Basta, each previously ran tech-focused boutique investment banks before turning to climate tech and what the firm calls 'tech for good'.

DAI Magister advises on growth financing and M&A in the UK, Europe and the US as well as in Africa, with one of its biggest deals being the sale of a majority stake in UK electric vehicle charging company Pod Point to EdF for over $100 million.

Below the big energy projects in solar, wind and tidal energy, there are many subsectors to climate tech, including mobility and sustainable transport, precision agriculture, satellite technology to better map weather and carbon and so forecast and mitigate climate risk.

Deschamps tells Euromoney: “Last year, $100 billion of venture capital and growth equity was allocated to climate tech: that’s 200% up on the year before. Meanwhile broad technology raised $700 billion. Right now, the volumes going into climate technology are way too small. But there is a real economic demand for it because of the costs to large companies and societies of climate risk and adaptation. It won’t be too long until climate tech is the biggest sector within technology investing.”

It was only a couple of years ago that the leading investors in climate technology were pioneering endowments and dedicated funds, driven more by the wish to do good than by the search for returns. But that is changing as the sums that companies are willing to pay to solve climate risks increase and returns attract larger private equity investors and venture capitalists.

“I would not be surprised if that $100 billion a year invested in climate tech soon doubles or even triples,” says Deschamps. “The development that played out over 20 years in technology investing will likely take five years in climate tech. Already the value points we are seeing in climate tech are comparable to those in fintech or software as a service.”

Question of returns

Of course, those valuations and prospective returns are now being hit by rising rates as are all other asset classes, and investors right now are “shell shocked”, according to Deschamps. But climate risk and the demand for ways to adapt to it, mitigate or move beyond it, will provide clear returns on investment. And the rising cost of carbon-intensive energy for businesses and consumers makes a strong business case for investing in climate tech.

“However, emerging markets may not provide the same returns that the now mainstream renewable-energy projects in developed markets promise investors,” says Deschamps, “thanks to the additional political, currency and instability risks. That is an issue that needs solving and will be a big topic at COP27.”

He suggests one way forward: “There are commitments of around $100 billion a year potentially available from developed-world governments, such as France, Canada, the UK and US. If, instead of crowding out private equity and lending to climate tech, and further leveraging emerging-market sovereign borrowers, that donor capital could remove those additional risk factors, that might incentivize private capital to invest in climate tech in the emerging world."

Right now, because some of the cutting-edge technology is still being developed, the potential range of returns is wide and uncertain, making much of climate tech the reserve of equity risk capital.

However, in the big renewables projects, debt plays a prominent role because there are predictable off-take agreements for the energy produced. The next step for climate tech firms that establish viable products and progress into revenue and demonstrable unit economics will be to raise debt so as to reduce their weighted average cost of capital and boost shareholder returns.

“In the interim, nascent climate-tech companies with a strong technology solution will benefit from venture debt,” says Deschamps, “and those a bit further up the profitability curve from private/bank debt financing.

"Larger financing for climate tech will eventually be possible using traditional debt instruments such as loans and bonds once larger and stable companies are created, and traditional energy is replaced with clean energy.”

Don’t miss Euromoney’s November/December magazine for more on equity investment in climate technology and adaptation across emerging markets.