Mini-grid company valuation in equity transactions

Unlock the hidden complexities of mini-grid company valuation with the brilliant minds of Brian Lukera Wambani from Camco and Michael Feldner from the GET.invest Finance Catalyst. This episode promises to equip you with the nuanced understanding required to navigate the valuation challenges faced by mini-grid enterprises, which operate at the crossroads of traditional utilities and agile startups. We tackle the pivotal questions: How do investors perceive the value of these companies, and what factors should CEOs and CFOs weigh when determining their company's worth?

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Transcript

Speaker 1 0:09

Solar mini-grids have turned from small pilots to an electrification wave. We were there when mini-grid regulation was established, when financial transactions were closed. We saw new technology thrive and companies fail. This is where we tell the stories. This is where we discuss the future the mini-grid business Powered by Inensys.

Speaker 2 0:35

Hello, this is Nico. Welcome to our episode on mini-grid company valuation in equity transactions with Brian Lucera-Wambani from Comco and Michael Feltner from GetInvest Finance Catalyst. Brian is an investment director and East Africa director of Comco. Comco is a specialist climate and impact fund manager in emerging markets. Prior to Comco, brian worked as an investment banker, most recently as a vice president at Standard Bank and previously at Rabobank. He has been involved in transactions and project finance, corporate finance and structured trade and commodity finance across different jurisdictions, including some mini-grid equity transactions.

Speaker 2 1:26

Mini-grid equity transactions Michael is working with the Finance Catalyst for more than seven years and focuses on IPP and mini-grid transactions with current mini-grid clients in Lesotho, zambia, senegal, the DRC and Benin. He is based in Johannesburg and his background is in stock broking, venture capital and infrastructure finance. He also coordinates the activities of the financial modeling team for the Finance Catalyst. Now, this is an episode that many CEOs of the mini-grid space will be very much interested in, because I have heard from some of the CEOs and CFOs of the sector that they have really issues in finding the right value for their company in equity transactions. Now, with an investor and a transaction advisor in this podcast today, I believe we have a good chance to find a solution to this problem today. What do you think, brian?

Speaker 3 2:22

and Michael, what is a big challenge within the space?

Speaker 4 2:25

I think that when I first looked at your question, I thought okay, valuation. Well, valuation is based on future cash flows that go through to equity. It always should be the case. It's just, how do you calculate those future cash flows? And it made me think about companies like NVIDIA, ai, startup companies. I think the world is currently believing that that company will keep on increasing its cash inflows, and so its valuation is sort of outlandish at the moment, certainly in comparison with mini grids.

Speaker 4 3:01

And mini grids, we tend to say oh well, you're trying to sell electricity to essentially poor people, poor communities, are they actually going to buy it? And so on. And why are you doing this? We thought you were doing this because you were helping them trying to get out of poverty, but we can't actually expect that you will succeed. So the valuations are generally very, very modest about the uptake of electricity and that's kind of counterproductive or even counterintuitive, if you think about it, that the very same people who provide us with the funds to build these mini grids say well, you will not succeed in achieving poverty reduction, but it's worked everywhere else in the world. It's sort of the first step to reducing poverty is electrification. So yeah, I think the valuations are generally very low, very pessimistic, and the timing is very short and it should usually be considered longer.

Valuing Mini-Grid Utilities and Startups

Speaker 2 4:04

Yeah, and that brings me to my first question what type of company is a mini-grid company? Is it an asset company? Is it an asset owner? Is it a startup company? Is it a mix of both? Can those be separated from each other? What are we actually valuating here? Is it the assets itself? Is it the future cash flows, as you just said, Michael? What do you think?

Speaker 4 4:28

I think in essence it's a utility, right? So you build and you construct a connection to an electrical network and then you collect money from your customers. So it's in essence a utility, and then we hope that it's a sort of recent trend. People are saying, well, it's not enough to just be a utility or to be something else as well. So please add to this some way of selling appliances, electric appliances so that you can create productive use scenarios in those communities where you're selling electricity, and those in turn should then increase your electricity sales over the short, long term.

Speaker 2 5:13

Yeah, I would agree. The core of a mini grid company is a utility. It's an asset owner, it's an operator of the assets and it's definitely communicating with customers of the assets and it's definitely communicating with customers. But I believe that mini-grid companies have more flexibility, they can be more dynamic than classic large utilities. Decision-making is usually quicker, assets are usually smaller, customers usually need more interaction, need more training than in large utilities and the customer mix is also different.

Speaker 2 5:54

And considering all of that, I believe that there is also some kind of startup dynamics in mini-grids. As you just said, people are expecting mini-grid companies to do more than just what a utility would do. But I also believe that there are many mini-grid companies that actually want to be more than a utility, that are thinking beyond just generating, distributing and selling electricity, but that are thinking about agricultural value chains and how to make additional revenues from being part of that value chain. They're thinking about mining, maybe become part of that value chain. They're thinking about, as you already said, the local productive users, how to foster that and maybe even finance the appliances and machines. So there are many different aspects of revenue and potential profit generation that could influence the valuation of a mini-grid company.

Speaker 3 7:01

Yeah, just on that point, Nico, you did mention two things. Is this a startup company and is it a utility? Certainly it has elements of a startup company. It has elements of being the first stage of operations being high cost, especially the elements of high cost and limited revenue and the fact that the business is not fully developed. When you look at mini-grids, these businesses, depending on which location, you're literally going into startup business there and it's not fully developed, so you don't know a lot of things, there are very many unknowns, and so there's an element of startup when you look at a mini-grid and an element of unknown, and an element of gambling, for that matter.

Speaker 3 7:41

When you look at a mini-grid In terms of it being a utility and this is the interesting part, and you both spoke about it is that in my view, it's a bundled utility company. So it's doing generation, transmission, distribution, which are distinct functions and which require certain skillsets. So you're expecting one person to have all those skillsets bundled and operate effectively, and then, on top of that, you're asking them look, go and create a market for your product. That's what you know productive use is. So you have widgets to sell and, you know, probably have five or six customers, You're told you know what get to 100 customers, so get a greater market for your product. So you see the elements. It's quite interesting and quite complex, and that's where the valuation of a mini-grid is. There's no formula, at least in my view, as yet.

Speaker 2 8:29

Michael just said, usually you would use a cash flow model and then just use a DCF methodology, right? You project your cash flows and then you discount your cash flows to calculate the net present value, and that, more or less, is then at least the largest part of the evaluation that you would do. Now, in a utility, and especially in a mini-grid utility, this cash flow, especially the long-term projection of the cash flow, strongly depends on the electricity demand, and we've discussed this forth and back and up and down. Demand cannot easily be projected over a long period of time. You never know if, in 15 years, a new factory will open up next to your village that wants to be supplied by your system. You don't know if, for example, a conflict comes up between I don't know herdsmen in the vicinity and the farmers of your village and then suddenly the farmers have to move out.

Speaker 2 9:30

You cannot project, you cannot say what happens in 10 years, 15 years, 20 years, 25 years. So therefore, how do large utilities do that? Well, I understand, of course, that they have a wider area that they cover and they have a more diverse customer base, and this is of course different than mini-grids. But the basic principle and the basic challenge of demand risk is the same. Do you know how they handle this and how the valuation of a large distribution utility is done? There must be precedences in the sector all over.

Speaker 4 10:07

I think let's be clear about that. I mean most large utilities, whether they be in Europe or in Africa or in the US, are practically insolvent. So valuation really comes into play. But we focus on mini-grid companies because we've established that they get concessions for a certain number of years and within that number of years we want to achieve a return for investors.

Speaker 4 10:31

In reality, once 20-year or 25-year concessions are over, you don't have a stranded asset, you have a flourishing asset that should be going much stronger than it did originally and there's no reason to take that concession away from you and there's every reason for the government or the regulator to provide you with a renewed concession. But in the European utilities and in the African utilities those were state-owned, so that question didn't come about With the mini-grid companies. I think that question comes about all the time and it's one of the risks that investors look at. But frankly, you know the subsidization that has happened on national utility companies, wherever you might go, kind of puts that question in the background of how do you value national utility companies? They just can't be valued on a cash flow basis because they're mostly cash flow negative, right.

Speaker 2 11:31

Yeah, yeah. And same in Nigeria, right, mostly cash flow negative, right, yeah, yeah. And same in Nigeria, right, where you have private sector distribution utilities. Even those are not doing very well, at the moment at least. Still hoping for the best and for the future, but at the moment it's very challenging, a very challenging environment.

Speaker 3 11:52

Well, yeah, come in, brian, please. Yeah, certainly you know, I agree with Michael. You know again I just go back to the point limited revenue and high costs. You know that doesn't make for positive free cash flows and more often than not. You know, when you look at a DCF methodology you're looking at, you know there being a steady state achieved. You know your terminal value is assuming that you have a steady state and that you know that's actually where most of your value is. But if you don't even know if you're going to get to that situation five years from now you're going to be alive or not then it's very hard to use. You know DCF methodology in its purest form You'd have to make some changes.

Speaker 3 12:26

You know you'd look at a DCF and this goes back to, you know, the valuation gurus. You know Demodran when he talks about how would you value a distressed asset? In a sense, I wouldn't want to put it out totally and say mini-grids are distressed assets, but when you look at it critically, you're actually looking at a distressed asset. And how would you value a distressed asset? So that, in a way, is one of the ways to look at it, but obviously, of course, this is a distressed asset, that again it has growth, you know in numbers. So it's a bit tricky In those cases.

Speaker 3 12:54

You'd now look at a multiple, so you know you'd go in your income statement and start looking for a positive number. So you'd start, you know profit after tax is negative. You know probably go all the way up to operating profit is probably non-existent and you probably go to revenue and say okay, let's do a revenue multiple. But then again, in our case, you know the mini grids, they're no comparable. So even using a multiple is again it's a thumbsack and you know, as Michael was saying, it becomes very difficult in that sense and it's also good to appreciate the fact that nowhere else in the world have these utilities been profitable just on the back of pure economics working.

Speaker 3 13:30

They've had to be subsidized, there's had to be a need for concessional capital for a couple of years to actually get them to a place whereby they've crowded in enough anchor tenants, for example industry, to come in and then they're able possibly to be profitable at that point. And then that then speaks to the mini-grid sector cannot be looked at in isolation. I'll get back to that point later on, but I'll just mark it that the mini-grid sector cannot be looked at in isolation.

Speaker 2 13:55

Yeah, but if I look at Germany, for example, where I'm from, the distribution utilities are making good money and I just recently saw that, especially during recent years, they have really made billions, like many, many billions of profit. The distribution companies right. So you cannot say distribution companies per se are unprofitable, otherwise nobody would probably invest. But still they are receiving investments. In some cases, like the German one, it works right. And these are private companies, these are not public companies.

Speaker 4 14:32

They're private companies in a mature market space.

Speaker 4 14:35

In a mature market space, indeed Very mature, but after the Second World War those companies needed an enormous amount of concessional capital in order to be built up and that concessional capital is exactly the same thing we are looking for, asking for African mini-grid companies, and nobody in Germany after the Second World War would have said, okay, we've got to finish this in 15 years and I want my return in 15 years or in seven years. It was always going to be a long-term project. So it's the same thing here in Africa. We keep pushing that number of 600 million people or remain unelectrified in Africa. If we keep not doing things, it will remain 600 million people because of population growth, or it will even increase. So we need to start looking at do we have the right kind of money being attracted to mini-grid companies, to utilities, or are we trying to privatize that much too quickly and compete against AI companies in the US and hope that we get a return on this? It would have been really unrealistic in post-World War II Germany and it's totally unrealistic in Africa now.

Speaker 2 15:55

Yeah, but I think that is where the opportunity to compare Europe to Africa ends, because I don't think there is an opportunity in Africa to somehow do all the rural electrification with main grid extension, as it has been done in Europe. Therefore, we need mini-grids, but mini-grids have, in the past, been operated by government actors public utilities ministries and in many cases, it didn't work very well. That is where the idea came from that the private sector should actually be involved, because private sector can have quicker, faster decisions, they can react better to local requirements, they are potentially more innovative, and that is what the sector needs. So I believe that we definitely need private sector here. Now we just need a way to finance the sector and the private companies, through concessional funding, of course, and after all, we need some public-private partnerships, as it is being suggested and tried and practiced in some countries already. Brian, you wanted to come in.

Valuing Mini-Grid Assets and Startups

Speaker 3 17:09

Yeah, I just had a burning, burning thing that I had to say when you look at concessional funding, I just had a burning, burning thing that I had to say and when you look at concessional funding, one thing you have to realize, at least, is that we really have to realize and understand, is that it is not infinite and it's not there indefinitely. So concessional capital should be looked at as a bridge. And I'll go back to the point where I said the mini grid of the power sector or energy sector should not be looked at in isolation, because for it to thrive, you need an enabling environment. And what I mean by enabling environment? You need an environment whereby you have manufacturers being driven, for example, in the case of Kenya, to come to Kenya. If you come, let's say, from Southeast Asia, or come from Asia and say the cost of production is high there, let me entice you to come to Kenya to put their factories here. That also means so that you're talking about the manufacturing sector has to be tied together with the mini-grid sector. At the same time, you need the right education for people to run these mini-grids, to undertake this manufacturing. Again, the mini-grid sector, for it to be successful, has to be tied to these other sectors. So there has to be an enabling environment for the mini-grids to be successful, and that's the part where I feel is not being discussed.

Speaker 3 18:17

They're totally disparate conversations whereby we'll discuss, yes, we need to electrify, you know Northern Kenya, for example, arid and semi-arid regions, which are difficult but you don't ask we take power there. And then what? What we should be asking is what can we bring in? How can we incentivize people to come in? And, yes, there'll be industries. And how do we make sure our population is well-educated to be able to partake in those industries? Then we can say okay, you know what People are here.

Speaker 3 18:42

Mini-grid, go and develop your mini-grid in this area because, yes, the national grid cannot reach there and there you have your anchor people, those people working in those industries. They have the income to afford electricity and you know they'll be able to afford other things. That mini-grids will just be providing the electricity and will not have to go even to this issue of productive use, because it's thought out in the way we are developing. You know our countries and so that, I think, in my view, is what is not being discussed and we're having mini-grids being looked at in isolation from you know the bigger development agenda or how that actually ties into other aspects, from education all the way to manufacturing and even the provision of incentives in these manufacturing areas.

Speaker 2 19:23

Now what I take away from what you said is that it depends also on the type of investor. How you evaluate a mini-grid company. How you evaluate a mini-grid company, Brian, as you just said, if a manufacturer comes from I don't know from Asia and sets up operations in Kenya, for example, and this investor says, okay, well, let me set up a mini-grid here because I need power anyway, why couldn't I just supply my workforce around the factory? That would probably be a completely different calculation compared to somebody going into a remote rural village and saying, hey, well, let's see how the demand develops, let's set up something and then we can expand or reduce the power generation capacity in the future. At least we must adjust. Can somebody find it? Two completely different cases and two completely different investors. Also, and probably two completely different ways of valuating the company and the assets.

Speaker 4 20:34

I think you've got a point there. But I think the main point is the number of years that you're looking at the investment. So we know that there will be more electricity consumed if the price of that electricity is lower, right, so we understand that relationship. So most of the investments that we see have like a 10-year, 12-year ticket. The tenor of loans are 10 to 12 years. I've done some exercises where I can literally halve the tariff that has been charged if those tenors go to 20 years and if they go to 25 years we can really boost the expected demand. So it's not exactly saying the same thing as you have said about we need industrial customers, but it is saying that if we keep the price low, if we can achieve low prices, we will have demand. And it's pretty clear that if something is really expensive then it becomes unaffordable.

Speaker 2 21:37

Yes, I agree, Lower electricity tariffs will probably attract more small to medium scale investments into industrial processing in rural areas. So what you're basically saying is, if project developers and their investors are willing to minimize mini gridgrid tariffs from the start, they would probably incur higher losses during the first say 10 to 15 years after commissioning but in the long run incentivize the local economy with their low tariffs enough to generate larger profits for the micro-utility in year 15 to 25 or so following system commissioning, I believe, deserves to be discussed in detail in another episode. Now let us look at the value of assets. Generation and distribution assets have a value, just like any asset in any large utility. Even if this value just can be turned into positive cash flows after some 20 to 30 years, they should have a value to patient investors already. So how do you evaluate these assets?

Speaker 3 22:48

I'd want to give an example. If you have $2 million worth of generation assets in a warehouse in Goma and $2 million worth of generating assets in Stockholm and you're told okay, give a value to a company, a mini-grid company, in those two jurisdictions, you'd certainly probably have a higher valuation for the company in Stockholm, but at the get-go they both have 2 million of generating assets. So on day one it's 2 million of generating assets, yeah. So you ask yourself what is the reason? Why would you then have two different valuations on day one, when you just have those assets in a warehouse? And those are the questions you have to ask yourself before you even open up a spreadsheet. Ask yourself what are the actual factors that would make this successful in one jurisdiction and very difficult to get to success in another jurisdiction? And here again you cannot run away from the enabling environment and from the basics. When you look at, you know things like government policy, you know that they're not going to have tax changes willy-nilly. Tax changes just happen. When you look at political risk, you know you want that certainty. Those are now premier that you'd put onto the valuation in Stockholm, for example. You'd say you know what? Okay, I don't think policy is going to change anytime soon. Political risk is probably stable. Market risk the demand is there. So those are the things I believe you need to first look at and have as your base before you even start moving into the spreadsheet and figuring out okay, if I extend this, if I give a different tariff, those basics have to be filled.

Speaker 3 24:21

And I draw reference to you know, the startup space again. When you have a startup and you look at how Y Combinator, for example, does their work, they will say we'll begin at a base of, let's say, a million dollars. Everyone that comes to us more, let's get a million dollars at base. If you have a tech company, you'll start at a million. And then we start adding oh, we'll the founder risk.

Speaker 3 24:41

These founders we've looked at they don't really look like the right guys. They don't have the vision is not clear, but they have a good product. So instead of adding 500,000 on top of that a million, say you know what for them, we'll just give three, it'll be a 1.3. You know that's where we'll end. The valuation will be at around. So those are the same things when you're looking at a minigrid need to be taken into account who is the founder? What is their experience in doing this? Are they able to execute? Do they have a good idea but the execution is going to be crap? Or are they a crap idea but they're good executors? You know, those are the things that you start looking at outside of. Okay, this is the spreadsheet, this is the number we've put in for this. Just the basics, and it's the basics that you'd look at in any other equity transaction, for that matter. So what?

Speaker 2 25:26

you're saying is, your evaluation or valuation methodology would be you look at the value of the assets owned, subtract the debt that the company has, and then look at the founders and say, well, these founders can succeed and that has also a value, and then you have a top up, basically on the asset value, considering the expertise and ideas and innovativeness that the founders bring to the table. Is that the right formula that I just summarized?

Speaker 3 26:07

I wouldn't call it a formula, but what I'm trying to say there is, it's a combination of tangible and intangible.

Speaker 3 26:14

Yeah, of course and I think that has to come through it's not an exact science. Valuation is an exact science. So what we're trying to do is what are the formulas or what can we put in place or have in place to make sure this is how you do it? But what I'm trying to say is that it's not an exact science and there are other factors that come into play that need to be considered, and those factors you typically you see for any company, but more so in situations where you have startups, is where you need to understand deeply, more than you know, a company that's been in operation for 30 years. You need to understand deeply, for example, in a startup, the founder risk. Those things need to come more in play when you're looking at mini-grids, for example, more than an amateur company. So what I'm saying is there'll be tangible and intangible aspects that have to be considered as you look at valuation, primarily because it is not an exact science.

Speaker 2 27:05

Micah, is that an approach that you would support? That's a nice approach.

Speaker 4 27:10

Typically, what we see, though, is that when somebody is trying to sell a mini-grid asset, or mini-grid as a utility, there aren't many buyers out there, and then the buyers dictate the price, and if you have a shortage of buyers, then your valuation tends to go below cost. But that's not unusual, I must say. From my background in infrastructure investing, it's not unusual that an infrastructure asset is being discounted when it's sold. If you take a bridge, for instance, it's meant to last 400 years or so, or 50 at least, and if you sell it, you usually sell it because you're distressed, and the buyer takes advantage of that. That's not an unusual scenario in infrastructure. I've seen that with airports, with bridges, even with mining setups, the seller is selling it because he's distressed, running out of cash. So, when you go into mini-grids, have a lot of cash, have a lot of cash.

Speaker 2 28:13

Have a lot of cash is always a good recommendation for everyone.

Speaker 4 28:20

And for the investors as well.

Speaker 2 28:23

Yeah, but that means that especially smaller companies and domestic African companies will have a hard time because they usually don't have much cash and they can just afford to set up some mini grids and then they need investments and they cannot acquire debt finance. So therefore, they're asking for equity and this equity investor will come and say, yeah, but the valuation of your company is very, very low, so I won't give you much, but you give me all your shares. That means that international companies will take over the market, these NGs and potentially the HUS powers who have just acquired large amounts of capital.

Speaker 4 29:03

I think it's generally not the right direction. We've just done some research in terms of the amount of equity that is available for renewable energy projects versus the amount of debt that is available. So we have an abundance of debt providers and very, very few equity providers, and those are requiring really substantial returns on their money. So if you say that you know a typical scenario, a mini-grid should be financed with 70% debt and 30% equity, but we don't have that 30% equity in the total universe of money that is available, then I think we've allocated it incorrectly. Too much debt that can't move because there isn't any equity. It's part of the problem is the allocation, if you want the color of money that we are putting into the sector. It's not the amount of money. I think there's enough money.

Speaker 2 29:58

Yeah, so now we have approached the subject of company valuation from a theoretical perspective, but there have been equity transactions in the past and I know that the two of you have been involved in some of them. So how have the companies been evaluated and how was the process in these transactions been evaluated?

Valuation and Investment Considerations in Mini-Grids

Speaker 3 30:25

and how was the process in these transactions? Yeah, sure, I think I believe here in the past if it's a combination of different methods. You know valuation again not being a science, so you know it's a combination certain instances, dcf, this cost plus valuation, you know talking about, you have your assets and you say you bought that at cost and then either give a premium or you deduct. So that's what we've used in the past. But I think here it waits to be seen whether these are correct or wrong, because it'll be in a few years that you'll be able to understand whether you overvalued or you undervalued the asset. You'll be able to know immediately and, yeah, we will wait and see whether we've actually overvalued or undervalued the asset.

Speaker 3 31:07

And that comes back to those points of what are those prerequisites that you'd want for any investment. But whether it's in the mini-grid space, whether it's in the FMCG space, that enabling environment, that, in my view, is what's going to determine whether a mini-grid is going to be successful or not. And it'll also tell us, you know, later in the future whether we've overvalued or undervalued. I can't really tell which is the correct method until probably a few years down the line we'll be able to tell okay, we valued it using this method. This is where this thing lies. Now there's something we missed lies.

Speaker 2 31:43

Now there's something we missed. Yeah and Brian, we already discussed about the various value chains that mini-grid companies are active in. Now, as a mini-grid developer and operator, if I approach you as Camco, I tell you hey, well, I have these 50 mini-grids here. They are all in agricultural areas. The farmers produce groundnuts and now I will collect all these groundnuts and pre-process them on site and, after all, the groundnut business will be 90% of my revenue and the electricity business will be 10. Percent of my revenue and the electricity business will be 10, but my capex will be 90 percent for the mini-grid and 10 percent for the. The rest, the collection and the processing of the groundnuts. Would you say, yeah, well, this is an interesting business because the profit potential is very high. Would you say, no, this is nothing for me because the aggregation of risk is too high and therefore the valuation is lower. What is your perspective on these mixed types of companies?

Speaker 3 32:55

So, nico, just to make sure I understand so you're saying the business is 90% production of groundnuts and 10% mini-grid in terms of revenue?

Speaker 2 33:03

Yeah, exactly, but you need your capex, 90% of the capex you put into the assets for the mini-grids to supply electricity to your farmers that are also your vendors. Yeah, like these types of business models are coming up more and more in Madagascar, in Uganda, in various countries.

Speaker 3 33:18

Yeah, the first thing is to understand what is the core business. In this sense it looks like the core business is production of groundnuts, because if that stalls, the cascade then stops. So in making that investment, that would be the first point of call. And then understanding pretty much, what are the drivers for a groundnut business to be successful? Right, that to me it's clear that the main business is groundnuts, the mini grid is secondary. And so understanding, clearly, you know, do they have the right personnel, for example, to run that business? What's the execution risk? Are they able to actually deliver on that ground at business?

Speaker 3 33:53

The challenge again go back to you know, what we're discussing in the beginning is we're trying to marry very many different businesses to make one business successful, which is the generation, transmission and distribution, and you're trying to marry very many businesses to make it successful. That's difficult in itself, knowing for a fact that you know 90% of businesses that start will fail. So now you have, you know, four different, five different businesses your generation, transmission, distribution, and then now ground nuts planting and then processing. Those are five different businesses. That in itself is a challenge no-transcript as such I think yes.

Speaker 4 35:01

Where we often hit a snag is that the investors are mandated to do clean energy, not agriculture. They have people who understand clean energy, they understand kilowatt hours, they possibly come from an electrical engineering background with some finance, but not from the agricultural background. So there's a complex setup that requires understanding. But we have one of those clients clients and it's not ground nuts, it's oil, but the example holds. They have offtake agreements for that oil. So if you put it all together, it makes a lot of sense and it takes up a large percentage of the mini grid that has now got an anchor customer. So you need not worry about the debt repayments. You need not worry about the individual customer on the other side who might have a slower ramp-up period, because you're going straight away. You're combining an IPP kind of setup with a mini-grid setup, so those kinds of situations are a blessing. In my opinion. It just needs somebody who understands how to value that and how to get in there and an investment committee that starts looking at much more diverse type business models.

Speaker 2 36:19

What we're seeing in the mini grid space as equity is mainly coming from the impact capital scene, and I guess that REPP Camco. You have also a lot of impact capital in your system, don't you? Do you see an opportunity, brian, to scale up that impact capital? Or, if that is is not possible, to tap into markets that are larger than impact capital and that lie beyond the impact capital sphere?

Speaker 3 36:53

Yeah, no, certainly. I mean there is an opportunity to tap into markets outside of the impact space. The impact space, in my view, is catalytic. You know you start the reaction, then you know you let the reaction go and it's on. It cannot be that you know you continue trying to provide a spark. It should be provide that first spark. In process engineering they call it activation energy. So you provide that activation energy and then you know you sort of let it go from there. You can't always be providing that activation energy.

Speaker 3 37:23

Now, in terms of the, you know the other types of investors, more commercial investors. Commercial investors will come when they can see there's a path to return, there's a path for equity investors, there's a path to exit that's when they will come in and that's when they'll be interested and path to profitability. So if those are not there, don't expect to go to the capital markets, because those investors are going to be harsh and they'll be like. You know this doesn't make sense. So again, it goes back to enabling environment. What are we doing to enable these mini-grids, or what is being done to enable these mini-grids, to be successful? If that is provided, then they'll be profitable at one point and then you can have further capital coming from the capital markets and from other sources.

Speaker 2 38:06

Yeah, Brian, you just mentioned exits and I guess that is another aspect that influences the valuation of a company. If you have a company that has good opportunities for exits, if this company is, for example, in a country where there are more investors interested, or if the company is also active in a value chain like groundnut or oil or whatever we discussed already today, the exit opportunity may be better than in an infrastructure only company. So is considered like do investors consider that exit opportunity in the company valuation right from the beginning?

Speaker 3 38:55

Yeah, certainly. I mean that just speaks to your liquidity or illiquidity premium. So you know, if you cannot exit easily, then you know it's illiquid and so you adjust for that negatively in that case. So that certainly is one of the considerations.

Future Company Valuation Methodologies in Europe

Speaker 2 39:11

Yeah, let's come to a close. Brian, do you want to summarize quickly what you believe in the future the company valuation should look like? As you said, there's no formula as such, but maybe we can come up with some basic methodology such, but maybe we can come up with some basic methodology.

Speaker 3 39:32

Yeah, so in the future. There's two things here. So, assuming that these companies are able to reach steady state and profitability, like you mentioned, in Europe, then conventional methods that we have, you know, your DCF, your comparables, those will hold. But until then I believe it will be a combination of different methodologies, primarily also then looking at these businesses partly as startups. And what does that mean? It means you have to take a gamble on quite a number of intangibles that you have to sort of have as your baseline and understand clearly as you use these combination of valuation methods.

Speaker 2 40:01

All right, okay, thank you. Yeah, thank you both. Thank you, brian. Thank you, michael, for your contributions here. Unfortunately, we didn't have much time today, but I think we discussed some very important points. Probably this was not an exhaustive discussion, so maybe we can have another episode sometime in the future, maybe at a time when the market is more mature and we have a better idea of how company valuation actually works in the mini-grid space. Thank you both. Thank you.

Speaker 1 40:35

Thank you for having us. This episode of the mini-grid business has been brought to you by Enensis, your one-stop shop for sustainable mini-grids. For more information on how to make mini-grids work, visit our website, enensiscom, or contact us through the links in the show notes. The mini-grid business Powered by Enensis.