Surviving Due Diligence - how to meet investors' & financiers' expectations

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 Inensis.

Speaker 2: 0:34

Hello, this is Nico, ceo of Inensis. Today's subject is surviving due diligence how to meet investors and financial expectations. My guests now all the details about due diligence, as they are investors and financiers in the energy space. Welcome, capucin Leroux from the Equity Investor, stoa, and Marco Vialpando from the Debt Financier, fmo.

Speaker 2: 1:03

Capucin is an investment analyst at Stoa InfraEnergy, an investment fund specialized in providing equity to projects and SMEs in the broad infrastructure space in emerging markets. Capucin has experience in both project finance and private equity and has worked in various transactions in the telecom, logistics and energy industry, with a focus on African countries In particular. She has recently been involved in utility scale and decentralized energy deals, including the mini-grid space. Marco joined FMO, which is the Dutch Development Bank, in 2019, where he has started as an investment officer in the energy department, worked in the compliance department and finally took up the bank's regional coverage of Europe and Central Asia. In that position, he has been involved in analyzing, structuring and executing potential financing of multiple energy projects, including Bangladesh, india, the Philippines, sri Lanka and Uzbekistan. Prior to joining FMO, marco worked for one of the largest global corporate banks, analyzing, structuring and executing structured finance in various sectors, including commercial real estate, infrastructure and energy in Mexico, where he's originally from. Marco, what is due diligence?

Speaker 3: 2:28

Yeah, thank you, nico, for the question. Allow me to respond by walking backwards on the financing process. If the ultimate goal is to obtain financing, the lenders must receive approval from a sanctioned authority. I'm going to be speaking from the lender's perspective. So, for the approval, the commercial people like myself, together with other specialists, or the deal team, as we call it, must submit a written proposal or request to the sanctioned authority. This sanctioned authority could be a credit committee, the management board, the investment committee. There's multiple names, multiple levels of approval required. So due diligence is everything that happens before that submission, basically. So the purpose of due diligence is to back up all the assumptions and, to the extent possible, mitigate risks with the analysis performed by the deal team. Due diligence is the process of identifying, analyzing and understanding all of the aspects of a potential investment or financing, coupled with the associated risks and their mitigants. It is key here to highlight that it is a tailored analysis done for each of the investment opportunities, during which all of the requirements of a lender or an investor must be fulfilled.

Speaker 2: 3:41

All right, thank you, marco Capucin. Where in an investing process does the due diligence come in?

Speaker 4: 3:50

Thank you for asking, nico.

Speaker 4: 3:52

So I speak from an equity perspective. Typically, we would likely not do that before we have discussed what each side of the transaction parties are expecting and we have a basic agreement on what are the main terms, what we are sort of both expecting, so that we know we're not just going to spend time and money without knowing that we agree. So that would typically involve writing the term sheet, and the commercial team on the financier side will need to have an internal approval for budget to hire external consultants. At this point we have quite a clear idea ready of what the company is doing, how they are performing, how they are structured, what this strategy is, but this is high level information that has been shared by the target company. So we are then looking to hire experts that are unbiased, that are very specialised and that will work a lot quicker than if we had to do everything to look into all the aspects that are legal, financial, ens, tax, commercial or market perspectives From a risk perspective, like Margo said, but also on the equity side, from an opportunity perspective.

Speaker 2: 5:08

What components does your diligence for a mini-grid company comprise? Capucino already mentioned the broad lines, but maybe you can go a little bit more into detail.

Speaker 3: 5:18

We have established already that due diligence is a tailored process and hence its components. If the structure of the financing is project finance, then in principle, due diligence will not necessarily differ much from my utility-scaled project analysis, for example. However, corporate lending has different requirements and mini-grids usually have aspects of both types of structures, so then it is a hybrid between the two. It is important to mention that lenders recognise the difference in risk profile and size and hence the difference also in resources available for the due diligence of the mini-grid company. Having said that, the due diligence process entails a combination of components, including desktop research, site visits, where the lenders as well as the investors will probably seek to meet multiple stakeholders, have conversations. An additional component is expert reviews, as Capucino just mentioned. So there is an independent third-party analysis by experts like demand advisor, technical advisor, insurance advisor, and these usually are in combination with the site visit and desktop research. An additional component is also extensive Q&A sessions and review of documentation. But what I think is very important and the nitty-gritty for me to mention is that the way I see the due diligence or the mini-grid industry in itself is I see it having three main risks from a debt perspective. One would be technical and demand risk, the other one would be tariff and grid encroachment and the third would be DNS, environmental and social. So, deep diving into each of them, it is worth to mention that these two work streams technical and demand are difficult to unbundle. When doing the analysis, I have been involved actually in opportunities where the developer prefers to unbundle in hopes of reducing the costs. From my perspective, there is synergies between the two, so there is little economic gain in unbundling, if any, but it can be done for sure. What we seek in the end on the technical and demand is to understand how end users will pay and how does the ramp-up will look like. In my opinion, the developer must have thought about demand stimulation. So what could the productive users of the electricity be, for example and this ties with understanding whether the load curve matches the solution proposed by the mini-grid company what are the components of the solution? Battery, solar diesel, a combination they're of, and these will be analyzed by the technical advisor, most likely when we come from. As a lender, we're looking at the cash flow assessment which comes from the kilowatt hour prediction, and if that is not possible to be sold, then it doesn't make any sense whatsoever. So that's the first risk. The next one on tariff and grid encroachment we seek to understand basically the regulatory framework under which the mini-grid company operates. What if the grid arrives, or if it is there and eventually upgraded so that end users can actually, instead of using the services of the mini-grid company, they use the grid provider? Would there be any remedies available for us as lenders who are actually putting majority of the money in some cases Question mark.

Speaker 3: 8:43

And last but not least, on environmental and social, ens, as we call it. So we want to verify the commitment to environmental and social from the developer, from the mini-grid company, as it is really of maximum importance. Urban setup is the expertise of a client, no questions, right. So they know the field, they know what they're doing, they know the end users, et cetera. How can they seize the knowledge that they have to make the business sustainable? As you can imagine, it is of great importance to us as a development finance institution. It is actually in our mission statement. We enable entrepreneurs to increase inclusive and sustainable prosperity.

Speaker 3: 9:24

So also on ENS, there's the analysis of how the solution looks like and this usually in my experience, we see a combination of renewable and non-renewable aspects in the mini-grid. So we want to, as a development finance institutions, we want to foster renewable energy, but for the mini-grid to be 100%, renewable energy sites would have to be supersized right. So naturally there would be a combination of sources and this is a dilemma for us how much is much, how much non-renewable energy we can accept? And there's, of course, other aspects of due diligence that I have not mentioned, but of course it's important. There's also insurance matters, for example, tax related diligence, that if not that an external advisor hire for the financing, we will do it ourselves, also internally and with the help of the mini-grid company.

Speaker 2: 10:20

Yeah, and especially these discussions around how much renewable contribution is required in contrast to how much diesel generation electricity can be provided. This is really what unnerved mini-grid companies are saying. Well, why do lenders engage in that? This is our subject. We know what is best for the profitability and we can clearly show you here and there. And if you increase the diesel here or if you increase solar there, you don't reach the optimum anymore. So why don't they interfere? So I understand that you have a mandate to interfere exactly at this point as a development bank where you have these two targets right On the one hand, the development of infrastructure and developing countries, for example, and on the other hand, the protection of the environment. Do you see any common kind of agreement between financiers and borrowers to come to an easy solution on this question? Because this is really taking a lot of effort from both ends and I see over and over again that this question exactly this question is not that much business related, but it still takes a lot of room in the conversation.

Speaker 3: 11:47

Yeah, from the lender's perspective, the best person position to do the strategy is a mini-grid company, right? So? And we don't really try to mingle there. But, as you mentioned, we have that mandate that we don't invest in non-renewable energy as a mandate. But of course we understand that in the mini-grid space this is a little bit different. So we have to be able to accommodate that perspective. And the key question and it always comes up, as you say, there's always how much is too much? This is literally a dilemma that we discuss in the mini-grid space. I don't think at least from my experience, I have not seen a number that is like make or break. But what we want to foster is really that the diesel generation or the non-renewable aspect, it's really used for the last bit of the load that is being used and not as a main source, because then we're actually funding non-renewable energy projects and that's not our mandate.

Speaker 2: 12:46

Yeah, and of course today there are also options to go for 100% renewables, like solar battery, if you include cloud computers, crypto miners of whatever to offtake the surplus electricity and monetize. The same as discussed in one of the other sessions. Capucin, now we have heard from Marco how he sees the due diligence from a lender's perspective. Now you come from an equity side. What is different between due diligence from an equity perspective compared to a lender's perspective?

Speaker 4: 13:24

So the debt side will have an approach that is quite conservative, because they're exposed to underperformance, but not to overperformance the way equity is. So that means that we will be looking more at opportunities in what's not necessarily in the business plan or what are the upsides, but on the debt side that is not so much. They will have an approach that is more risk-oriented. Now, on the ENS side, for instance, I would tend to say that as shareholders we have more ability to make change happen and push for adoption of different policies by the company. That's probably the main difference, where I imagine that we would come with a set of recommendations to be adopted by the company, maybe. So I mentioned technical and commercial. That that's the main difference. I'd say that on the legal side it's the contract and regulatory. That would be sort of the same approach and that's probably what I meant. But a lot is the same and some is different.

Speaker 3: 14:30

For us on the lender side, on the debt perspective, we really seek for cash flow certainty. Now mini grids are really the man-risk. So that means that these mini grids kind of fall into the merchant kind of bucket if we're thinking also of utility-skilled projects. And that's where lenders really start to feel kind of uncomfortable because we don't necessarily have certainty on cash flows. But we do try to be a diversification, if you may, so the multiplicity of end users. We start to find comfort and that's where and why mini grids actually also are acceptable and we like it because of the impact, mostly because of the impact that they create and also because of the risk, we find that acceptable. But I think the glasses, that the equity and the debt side view, the due diligence is a little bit different in the commercial aspect. That's the main thing.

Speaker 2: 15:32

Yeah, marco. You said earlier that mini grids are somewhere between commercial finance and infrastructure or project finance. Kapo Sien, you're probably even more exposed to this kind of question. How do you see mini grids? Are they more corporate finance or are they more project finance? And how does that reflect into due diligence after all?

Speaker 4: 15:58

They really are a mix of both, but it depends who you are talking to. So Sextoa, for instance, is traditionally an infrastructure investor. We've looked at many transactions, but we're only just now looking at properly investing, and the reason is because previously we would have been used to projects where the revenues are contracted and where there is little risk on demand, and that is one of the main characteristics of infrastructure finance is that you are able to foresee what the revenues will look like and they will be sort of stable, and obviously that's something that is a lot harder on the mini grids side. But also when you look at technically what it is, what it is infrastructure and it could be financed in a way that is similar with, if you bring together enough projects, a batch of projects that would be together big enough to be financed by a big debt, for instance, raising process. So I would really say it's in the middle of the two, and if you're trying to convince your committee, who's very conservative and willing to look at everything from an infrastructure perspective, you will bring up the technical side of it. You will bring up the fact that you also have commercial risk on some infrastructure projects, on transport projects, for instance, and then it will be a bit different when you do the actual due diligence.

Speaker 4: 17:33

Because, for instance, if you're looking at an infrastructure project, finance project, you will not necessarily look at the team, you will not necessarily look at how good they are at rolling out their sites. And now you're looking not just as one project but also the whole organization behind it and you want to understand, because there's a pipeline. You want to understand how they select the sites. You want to understand what are their options if something goes wrong and they have to bounce back. You have to understand how good they are at displacing sites, selecting the types of clients. So everything is not set from the beginning the way you would expect a lot more for an infrastructure or typical project finance transaction.

Speaker 2: 18:20

Thank you, marco. You already said that due diligence is usually tailored to the specific projects, but we already said that there are also components which are kind of the same, not only from an equity and from a lenders perspective, but probably also from one due diligence to the next. Do you think that there could be potentially a kind of standard and, after all, maybe even a checklist that a mini-grid company can pick up to prepare for due diligence?

Speaker 3: 18:54

Yeah, no, no. I mean, it's an interesting question because I don't necessarily think that there is a specific set of standard or like a specific checklist that would apply to all of the companies, right? So if we think about it from a strategy point of view, one would expect that each mini-grid has their own competitive advantage and they're different in some shape or form to another mini-grid company Because of that. Of course, we do have a checklist or a list of items that we will be as a helicopter view, we will be checking or touching upon, but in some cases one item will be much more in depth or much more relevant than another mini-grid company. For example, on the ENS aspect, we usually use the IFC performance standards.

Speaker 3: 19:40

In this regard, it is worth mentioning that health and safety is usually and I'm curious to hear what the Capucin has to say about this but for us, we have experienced that health and safety is usually a challenge in the mini-grid space Because, even if it's a small-scale energy projects have impact on people, right, and the impact comes in terms of distributions, networks within an urban setting. So managing those in a way that is reasonable and practical becomes crucial. So what I'm trying to say is that the IFC performance standards. Are there the standards? It's a list, basically, of eight standards and those have to be adapted and the question is how to work around those or maybe around is not the right word, but how to work on it.

Speaker 3: 20:27

What is reasonably expected from a smaller budget, usually in the case of the mini-grid companies, within a smaller project context, but that has a very large impact. Another, just to mention another important protocol that we also look at is the consumer protection protocol. By the way, we call it CPP, and in this sense, we actually find the Google as a consumer protection code very hands-on, and so we look at it. Why is it important? Why is it become relevant? Well, we want to be invested in a project or in a company that creates a positive impact in the lives of the people, so we seek that the end users are protected, which, in turn, will probably make the business sustainable, and this hopefully drives a virtual cycle that is driving demand, and then, you know, job creation, etc.

Speaker 4: 21:19

We have had this experience of getting a systematic answer from the target saying this does not apply to our operations, this is to a broad, this is not tailored, so there's probably some adaptation of these to be made be applicable to that specific company, because it's not just like any project in this industry, it's a bit more specific. So there's this that needs to be done, and also on the community side, because if the community served by the mini-grid is not happy with the way it is done, there could be some discontinuation of activity. So it's not just an ENS perspective but also an operational risk perspective.

Speaker 2: 22:04

Sure, all right. And regarding the standardization of due diligence approaches for the mini-grid sector, enensos has developed some guidelines already. One of them is for the Nigerian market and I think they have been published. Maybe we can link those in the show notes. Capucine, how much does a due diligence cost and who pays for it?

Speaker 4: 22:30

Very quick question I would say and that's not an answer you would like it depends. So maybe I can give you a big amount that would cover everything and then sort of like brackets. So I would say that what I've seen is maybe 500, 600 K as a expected amount for the whole set of due diligence is. So for instance, on the technical and commercial side we could see fees between 50 and 100 K. But luckily, on the higher end on the financial side, it depends whether the financial modeling is done externally or whether it is not. But it could go up to 200 K and then legal can vary quite a lot depending on the jurisdiction. I would say maybe around 300 K. All of this is just an indication. It varies quite a lot. And then on the NS side I would see figures up to maybe 50 K, and then there's a couple of additional work streams that you could add, for instance insurance. That would be a lot less. But those are the numbers I have seen. I don't know whether you've seen sort of the same figures, marco.

Speaker 3: 23:45

Yeah, thanks, kapusin. I think that was actually much, much more comprehensive answer that I could actually have shared. I agree with you. I think we have to be very careful in answering this question in order to manage the expectations of the audience, right. So, touching upon what we discussed at the beginning of the conversation, project finance structures are much more expensive than corporate finance loans, and this is actually one of the main disadvantages of project finance, whereas in the case of corporate loans there is contamination risk, right? So if you provide a corporate loan, it may be cheaper because you're relying on the overall business of a company, but then if any aspect of it goes belly up, then the lenders will be able to call upon the security of the whole corporate.

Speaker 3: 24:32

I think the specific in the cost of the due diligence I think you mentioned 600-ish K. In my experience, legal costs tend to be the largest portion of it. I think you mentioned about 50 percent. I think you mentioned around 300, maybe about for legal aspects. In my experience it usually tends to be higher. I'm trying to tie up these to the three risks that I mentioned at the beginning, that's, grid, encroachment and tariff, because there's analysis on the grid, on regulatory framework, on financing documents etc. Then the second risk and probably the second most expensive item of due diligence will be technical and demand. That's where we're looking at you, nico. I think maybe you are actually even in a better position to answer, but I think that's also usually the second component that tends to be the most expensive. In all honesty, I have seen due diligence costs being as high as 7-10 percent of the total financing package, which is a lot. But the thing is that when Capucin, of course, was mentioning 300 K, for example, for legal, that's probably not going to be much more different from a larger project.

Speaker 3: 25:47

I think that's part of the analysis that we also do at the very beginning. We like to be very upfront about this with the mini-grid company that the costs are going to be high so that they can also take a strategic decision at the point of development that they're at, whether the financing, the loan, makes sense right now. We understand, and I do recognize, that owners are passionate, so they usually minimize the aspect as they see the funding as a means to scale the company. So we also actually do at the very beginning an analysis of do we think that this financing will make sense to them, and we come to the table already with a view but not prescriptive right, so we will discuss that at the very beginning of the conversation. We will require A, b, c and D being legal advisor, technical advisor, demand advisor, e&s advisor, and this may amount to I don't know this figure, we believe, but we have to make a request for proposal or a request for quote, and that's where the very first conversations start.

Speaker 2: 26:49

In my experience, yeah, well, these numbers that you just mentioned really sound very much inflated to me, to be honest. Like I think we have never really issued any proposal or any quotation for a technical due diligence which was more than $80,000. In many cases it's actually much less. It of course, depends on if it's one country or how many mini grids we're talking about, and so on, but I really see a lot of potential for standardization, as we already discussed, because, like, think of legal due diligence, like if you go into a country, like what do you check? Like you check on whether a mini grid company can do business in that country, right, you check about the repatriation of funds, of money. You check on probably import and these kind of things and how these legally work and how the rule of law is and these kind of things. But, like these are questions which do not need to be answered for each and every individual case in that country again and again and again. Like you prepare this once, then you have that in your drawer, you pull it out and many law firms just put that on the table and say give me $50,000 for this or give me $100,000 for this. Well, but it has been paid once it probably has been paid twice already.

Speaker 2: 28:14

So like I think we really need to talk in this sector, we need to talk about standardization of due diligence, also on our end, also on the technical due diligence side. Like we are offering this technical due diligence, as I said, as a probably reasonable price, but there is still room for reduction if we standardize right, if we all agree on a certain procedure, and the guidelines that I mentioned before are kind of a first approach towards that. But of course it requires a lot of discussion and like 10%, 7% to 10% of an investment, who can afford that right? Nobody. Capucin, you wanted to come in earlier please.

Speaker 4: 28:59

I think we should mention here that typically that finance related due diligence costs are borne by the company itself. On the equity side it is a more nuanced picture. I have seen transactions where the costs were low and they were shared between different investors, and I have seen other ones where they were much higher and everyone involved did have to question do we think this is worth it? And in that case I would see it a bit more a situation in which the target company would also pay for a portion or all of the costs. But this is not always the case and that also depends on the amounts.

Speaker 3: 29:41

Maybe just things, Capucin, I think one aspect, and I think that's important because it's interesting from the discussion perspective. You know I did mention 7% to 10%, which I agree with you. I think it's a high number, but of course it all depends on the base. So that's very important, right? So you, Nico, yourself, just mentioned, okay, see, you know, from the demand point of view, the cost may be 60 to 80,000. In the case of the lenders, if the loan is one million, let's say, then we're actually already talking about that way larger number than that figure, right. But if we start to scale up the financing, so if we're talking about 10, 15 million, then of course then we're looking at 2%. So I think it's really dependent on the base that we're using and it's not that, you know, if it's at 15 million financing, then it's gonna be 10% of that.

Speaker 2: 30:32

Right in the mini-grid sector there's so much potential for economies of scale. If you electrify 100 villages at once or 500 villages at once, you come into completely different commercial calculations and projections, and that also, of course, can be seen here on the financing side. But the financing side is not the only item here. Overheads, management, transport, procurements, like all of that benefits from economies of scale. This is just another reminder that we have to think big. We must think big in the mini-grid sectors to succeed. Marco Capucin. Equity and debt due diligence be combined to save money. You touched upon this, capucin, earlier, just briefly. But I believe that standardization is one thing to reduce costs, but if equity providers and lenders share certain components of the due diligence, exchange documents and so on, that would significantly reduce costs. Don't you agree? And is that possible?

Speaker 4: 31:41

I would say that yes, the answer would probably be yes to a certain extent, but there would be some conditions for this to happen. We would need standardization so that whatever has been done by another party can actually be used. We would need to see the debt side, the equity side, coming in roughly at the same time, because maybe otherwise the information that has been included in the report is no longer valid. So that could be a big reason why, if it's dated maybe six, 12 months before, won't be considered relevant anymore and 100% the newcomer will say that's not enough for me. I will do a new one with my requirements, and that means that beforehand there needs to be coordination between the different sides to agree on the scope and to agree on the timeline so that it could be relevant for everyone and we avoid being redundant by doing the same work several times. But in theory, if that is done, we would go in the right direction to be able to share.

Speaker 3: 32:48

Indeed, yeah, I mean I completely agree. I think some aspects can. There's potential for sure to combine it to save money. I certainly dislike and I think you will also, nico to answer as a MBA graduate, but it really truly depends, right. I think Capucin just mentioned it. I think, for example, let's imagine on the technical side, so that's gonna be a given right. So we already know that there's gonna be, let's say, the solution is gonna be battery with solar. So then we know that and most likely the technical aspect is gonna remain the same in that sense, right. So the solution is gonna be the same throughout the history, probably, and so there may have been already cases where the solution has not changed and there's a technical report that we can use and then we don't need an update on that.

Speaker 4: 33:38

I would maybe add that it seems the overcoat seems to be like it would work better in a way that equity came first and then they've done some due diligence and then these reports can be used by the debt side. But because of what we talked about earlier, when we said that because of the exposition to other performance on the equity side, they would likely maybe be a bit more comprehensive or go beyond in terms of what would be covered by the due diligence, especially on the commercial side and the opportunities to say, go to another country, diversify in a way or another that maybe on the debt side that would not be done. So it means that that would maybe useful information for the debt side. Maybe not, but here it is the other way around. Maybe would work a bit less well because we would likely want a more expanded scope. So that's why, yes, but either equity comes first or the two coming at the same time and get to have discussion on what is in the scope of work.

Speaker 2: 34:40

Yeah, the equity and debt providers coming to the table before due diligence is actually conducted is the less likely scenario, I guess, because a mini-grid company would always try to keep the sources of funding confidential until it actually has been implemented. Otherwise it would give up its negotiation position, even if it's between equity and debt. But sometimes equity and debt are also in competition to each other. And then I see that there may be in some cases, equity providers or even the sponsors not willing to share the documents because there are certain business secrets involved that are only revealed to the equity provider Because that equity provider is supposed to become a shareholder in the company, whereas the lender, let's say, should not know that much about some certain very detailed aspects of the company.

Speaker 2: 35:47

Yeah, but this brings me back, capucin, what you said before also, like if we standardize the process and at least say we have a standardized structure and have a standardized procurement procedure for services for due diligence and kind of a standardized catalog of requirements of what credential service providers have to bring, then probably we can share these documents much more easily and potentially just not the full document but only sections, parts, paragraphs, I don't know chapters out of the documents, and then potentially we can even under the standardization approach, we can even find a standardized cost sharing of this.

Speaker 2: 36:35

This, I think, would benefit the mini grid sector a lot, because mini grid projects are not that different from each other, not anymore. Right? Some years back that was the case. Each mini grid project looked a little different, but nowadays they all are more or less going into the same direction. Of course, every company has got its own unique selling proposition, but that could be worked out also under a standard approach. All right, let's go a little bit deeper into the due diligence components, capucin. What data is required for each of the due diligence components from the mini grid company? How can the mini grid company compile the data to be easily digestible for investors and financiers and their advisors?

Speaker 4: 37:26

I think I will start with practical considerations in terms of how the information could be passed on, just to make it a lot more easier. It might maybe it is a bit obvious, but a well-structured online data room with shared access for all the advisors is a fantastic way of doing it. I say shared because we tend to see similar requests for similar information coming from different advisors. Then the company opposite gets a bit annoyed or does not really understand why the information is not being shared the way they expected. I think this is a good practice. I think it is a good practice to have broad data if possible, so that the advisors and the equity that providers can do their own analysis on the raw data over time as well. There are probably two steps to populating that data room. What can be put in the data room before external advisors are hired or start their analysis? That would be high-level information. Then, when they come in, they will request a set of more precise documents, especially on the technical and commercial side. They will ask for performance information and they will likely do a sampling. Maybe this type of information comes second. To begin with, we maybe have more policy documents kind of information, I think. Now on to what should be in the data room. I think one way of seeing it is to start with, we want to back all of the information that we have in the model. We want to make sure we know where the inputs come from and whether we really believe them based on objective figures. We also want to make sure that we have a comprehensive understanding of how risk is shared.

Speaker 4: 39:48

On the commercial side. We would have maybe what could be put to start with, at the very beginning Market research, whatever was used to put in the business plan, the projection. We want to be able to rationalise the projections. We also want to be able to quantify but also qualify the existing portfolio and the pipeline. Then what is useful as well is get a sense, especially maybe on the well, maybe probably both equity and debt side, say, set selection, pricing policy documents. It's not something we understand later in the process, but we can start processing right away to get a sense of how the company is structured, how it works, what it looks at In terms of financing. It would be, I guess, very typical for any transaction. We would ask for historical financial statements. We want all the financing agreements that will be reflected in the model, but also still, we understand the terms that were previously offered. Maybe recap tables are very useful if that's a company that's been around for a little while.

Speaker 4: 41:09

On the legal side, we will want to look at the contracts, the main contracts. Unlike pure project finance transactions, there will be a lot less contract, especially on the off-take or demand side. There's typically no contract, but the couple of contracts that the company has. We want them to understand who they're with and also how the risks and the responsibilities are shared. That would be maybe things that we would put at the very beginning.

Speaker 4: 41:42

On the ENS side, I would say any policy document and internal external report relating to these. On ENS aspects, that would be, marco. You mentioned health and safety. It would be community. It would be resource management, so water but also waste. It would also be land acquisition. Now, when all of this to begin with is on the data frame, both the commercial team and the advisors can get started to analyse the whole transaction. Then we will have a second wave of information requests that comes in after this initial analysis of documents, especially on the technical side. We will ask for samples. That would be added next, because we would want to aim for randomly selected information, so that it's not just the best performances that are shared by the target company.

Speaker 2: 42:46

If you, as a service provider due diligence service provider which ENENSUS is in some cases look into a data room and see that it's just half filled, you say because, then you have to prepare a very long list of what is still missing. Usually the company takes weeks, in some cases even months, to fill the data room. Therefore, any mini-grid company is really strongly advised to gather revenue data, to gather sales data, kilowatt hours delivered, as you said, capucin, raw data that can be reviewed and that can be analysed by the consultants into the data room. The data room is basically just an online folder, usually protected by password. Marco, how can mini-grid companies further prepare the data room even before the list of questions from the investors and financiers are available?

Speaker 3: 43:50

No thanks, I think. First I wanted to just say that my recommendation and kind of to say the obvious, I guess, but it's really to invite developers to make it easy for both investors and lenders to find and scrutinise all of the data. If I had to say one main thing of data that I would really like to see up front probably would be the raw data in itself, so that we can analyse it. As Capucin just said, that information in the case of the demand, smart meters already help, but the raw data in itself I don't think it's useful as a commercial team, because we don't necessarily always have the expertise, the technical and demand expertise, as you yourself, the external advisory Nensos have, for example.

Speaker 3: 44:40

Another aspect that I just want to highlight also is that if the data is not comparable throughout the over time, then really there's no use to it. Meaning, if the accounting methodologies change all of a sudden, revenues are recognised differently, costs are different, so then we cannot really compare them across time. Then we really start to question much more things, and it's not just about the data but it's about the business practices. So that's also something very important to have in consideration and that has to be built on in the history of the mini-grid company.

Speaker 2: 45:16

Yeah, coherent data. That's for sure what mini-grid companies should deliver, but many mini-grid companies don't have. But what I see even more often is that mini-grid companies are really holding back data because they are afraid of sharing business secrets. I would like to hear from both of you quickly Does it make sense to hold back data?

Speaker 3: 45:40

I mean, yeah, I agree, I think in my professional experience or career many of us think that when we need to, it is my opinion that mini-grid companies are the most reserved with their data, their information, which I understand they want to keep their competitive advantage. But, as you mentioned, we have very strong agreements with the developer, with the mini-grid company or our client, through the non-disclosure agreement. So there's very strict requirements or protections that we have to enable and to foster, to allow for that trust to be built. So if it meets really difficult at times to understand that protection from the side of the mini-grid company, because that's really in a way of I don't want to say obstructing, but like it gets in our way of doing the analysis right, and then we face like a wall of okay, well, we need that information, but it's private. So how can we explain, as we said at the beginning, to the decision makers that this is a process and that it makes sense, etc.

Speaker 2: 46:41

Yeah, and in many cases the resistance and reservation also is addressed to service providers like us. But we are also tied into the same NDAs, non-disclosure agreement procedures, either from the bank side or the equity provider side, or with the sponsor, with the mini-grid company directly. The message that I would like to send here is that if due diligence is properly prepared, then in the long run, or even in the mid run, due diligence will also become cheaper, because service providers understand that they don't need to run around forth and back and ask for this and that and don't get the data and then ask again and have another meeting and dig deeper and try to find the same information through other channels, and so on. Yeah Well, that will save cost on all sides. After all, maybe we need to work more on the non-disclosure agreement ends I'm not sure.

Speaker 2: 47:42

Maybe we need to make sure that this is 100% waterproof and then we can create the trust that the mini-grid companies need to share data. All right To the next subject. In parallel to the review of data, field visits take place. Marco, how do field visits work and what do investors and financiers look for in field visits?

Speaker 3: 48:10

I personally see it as a knowledge transfer. I think that it's important to understand that. We don't want to dwindle in the strategy of the mini-grid company. They have to educate us in their business how they operate. We're basically here to help them. We want to understand what is it that they're trying to achieve? How are they trying to achieve it? In the commercial teams? We buy into that, we want to buy into that, and then we basically structure in a way that the decision maker can make the call.

Speaker 2: 48:42

Good when we come from the side visit. What is the next step after that and what is the next step after due diligence towards the financial close Kapo Zin? Maybe you want to answer that.

Speaker 4: 48:56

Once the due diligence is finished, it means that we have reached a situation in which we're comfortable with the assumptions that we have in the mall or with our understanding of the risks and the responsibilities and the opportunities. We are able to go back to the terms that we initially negotiated or discussed with all the parties and confirm them or tweak them using what we have confirmed or understood better. During the due diligence phase, we will discuss these conditions and write a binding offer for laying out these conditions. Once that is signed and agreed agreed and signed by everyone there will be the drafting of the documentation that is the reflection of those terms that were negotiated. That takes a bit of time and that usually comes after we have agreed on the new terms, if they're a bit different.

Speaker 4: 49:58

On that, I would actually like to quickly mention that, unlike due diligence, it is not possible to do one common documentation set for debt and equity, because the instruments are entirely different and involve very different refinancing documents with different closes, and it's simply not at all the same conditions and documents. That would be something that cannot be combined to save time and costs, because on the equity side we would have a share purchase agreement, an investment agreement, a shareholder, rather agreement laying out how the governance is organised, and then on the other side, on the debt side, we will have a I'm not sure what it's called debt financing agreement. Those are just entirely different documents. They will then be drafted and, in the drafting and the negotiation of the way things are drafted are worded, parties will identify condition precedence to signing and or closing, which are conditions which needs to be complied with for the financiers to send or to sign the documents or send the money. Once that is done, we are signing and then we're closing this transaction and we have reached the end.

Speaker 2: 51:24

How long does the whole process take, and what percentage or what portion of that does the due diligence cover?

Speaker 3: 51:32

It depends, but on average I would say that six to eight months is usually the process that we see and that's kind of back to back from the first stage approval to the last stage of the approval, so on up to and including FB financial proposal.

Speaker 2: 51:49

I see Capucin. What is your experience on this? How long does it take?

Speaker 4: 51:55

I would say probably the same. I think the quickest I've ever seen and it was a very straightforward transaction with only two parties involved and limited due due diligence, because we knew the industry quite well was maybe four months, and that was in a situation in which we really really had a simple transaction. In a transaction where we have several I don't know about the debt side, but several equity investors, for instance it could just make it a lot longer because you need to go through what everyone thinks about, everything about what the report says, about what are the conditions of the transaction itself. Can everyone fund at the same time? Is everyone okay with the condition precedence that we have laid out? So that can just make it a lot longer.

Speaker 2: 52:58

All right, let's sum things up and talk briefly about what your organizations have done in the mini-grid space and what you're planning to do in the mini-grid space. How many mini-grid companies have you invested in or financed already? What's your pipeline? Who wants to start?

Speaker 4: 53:20

As I previously mentioned, as an infrastructure investor, has traditionally looked at more project finance transactions and has, over the past couple of years, looked at a great amount of transactions in the mini-grid space, but we're only today approaching the actual investment in the middle-grid company. I think the fact that we are doing it today tells a bit about what is going on in the industry at the moment. I would say that more commercially minded investors like Stoa and I say that as opposed to DFI-like companies like Afferman and others would likely come second. Maybe DFI's would come first. The fact that we're seeing companies like Stoa interested in the industry at the moment we are only also seeing, I think, on the debt side.

Speaker 4: 54:10

I saw that Trudas Bank or investment I forgot what it's called it was also looking into the industry at the moment. I think maybe it's a sign that we are approaching a situation in which the industry is becoming mature enough for more commercially minded investors to look at these companies. Hopefully, as profitability is reached by more and more companies, we could see more commercial investors like Stoa and even more commercial joining at CrowdIn and investing these companies and help them grow, because we know their actual solutions to actual problems. Until now, the profitability side has been a bit of a hurdle for investors like us to come in. I think we're coming to that moment in the development of the industry where we can start seeing that a lot more.

Speaker 2: 55:01

What a great outlook, Kapustin. Thank you, Mako. What about you?

Speaker 3: 55:05

Yeah, I like the outlook, Maybe to answer about pipeline or the opportunities that we are in. We have finance about six mini grid transactions that are equity or both, in various countries, including Uganda, india, sierra Leone, nigeria, and, needless to say, we have analyzed many, many, many, many, many more. I'll stick to say that we have quite some opportunities also in Africa and in Asia and that we're very actively looking. We also do see, as Kapustin just indicated, we do see growing momentum in the likes of IFC, afdb, as well as other European DFIs from the lender point of view. So we expect, actually, that the financing will go up. We at F&M all have established a specialized working group with regional representatives, as well as both products equity and debt for the distributed energy industry. So, long story short, we do expect to continue being active in the market. We like it. We are eager to support mini-grid developers. We recognize their challenges and we're more than happy and we're eager to work along with the mini-grid developers.

Speaker 2: 56:20

Thanks a lot, Marco. Thanks a lot, Kapusin. That was very insightful and I hope to talk to you soon.

Speaker 3: 56:26

Thank you very much. Thank you for having us. Thank you very much, Nico and Kapusin, for the time.

Speaker 5: 56:31

Hello everybody, my name is Fiona Fiebig. I work with Enensis as a legal advisor and business development associate. Though mini-grid business models are increasingly converging in their structures, investors and financiers typically approach every due diligence as a unique endeavor. But there's a promising alternative on the horizon, which is the potential to standardize this process. By harnessing and reusing existing data tailored to specific countries and markets, we can significantly cut down both the time and costs involved in due diligence processes. But the onus isn't solely on financiers.

Speaker 5: 57:15

Mini-grid companies themselves have a great role to play. By offering transparent and comprehensive data up front, especially raw data on past electricity generation, distribution and sales, can they enable due diligence service providers to dive directly into analysis rather than data gathering. This proactive approach not only accelerates the process, but also translates to cost savings. Moreover, forward-thinking mini-grid companies are identifying efficiencies by synchronizing their equity and debt due diligence efforts, tapping into synergies between the two. Lastly, a very important consideration for mini-grid companies, there is absolutely no need to view due diligence or side visits with trepidation. The commercial team working with the investors are your friends and you can work together to convince the credit committee. In essence, the future of due diligence lies in collaboration, transparency and harnessing efficiencies.

Speaker 1: 58:28

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