EXCLUSIVE: Private money took the equity and development finance took the debt
Camco built REPP 2 expecting commercial investors in the debt tranche and development finance institutions in the equity. Speaking to ENN, Fund Director Benjamin Hugues says the opposite happened within the equity, and puts it down to defence spending shrinking the development finance available and Western governments choosing returnable capital over grants.
Camco structured its second fund on an assumption that has turned out backwards, expecting commercial private investors to take the debt tranche and development finance institutions to take the equity.
“The opposite happened, actually,” says Benjamin Hugues, the fund’s director. “Most of the LP interest that we have from private investors is in the equity tranche, and most of the DFIs went into the debt tranche.”
The inversion sits within the equity rather than describing an absence of development finance, since REPP 2’s junior equity tranche is provided entirely by the Green Climate Fund and REPP, and Norfund sits in the senior equity tranche alongside the private commitments Hugues describes.
His reading of it is a change of degree rather than direction, in that the institutions created to take risk are still taking it but taking less of it via riskier equity investments. He attributes that to less development finance being available in general because of defence spending, and to a choice made by Western governments to go into development finance with debt and returnable capital rather than equity or grants.
Coming in alongside them are family offices, private impact funds and private wealth funds moving into the equity tranche, which Hugues says is good to see.
REPP 2 writes between $5 million and $20 million into individual projects, a band chosen because most development finance institutions will not go below $15 million and because African grids cannot absorb anything larger. “Most African grids are a bit weak and cannot take on very large projects, very large hundreds of megawatts,” he says. “What African countries can absorb is smaller projects, the likes of 10 to 25 megawatt projects, and decentralised in rural areas.”
Three things changed between the two funds. Early-stage development capital in emerging markets invariably produces a negative risk-adjusted return, so REPP 2 separates it into a Technical Assistance Fund sitting outside the commercial vehicle. Exposure to pure off-grid power, which was large in REPP 1, is now capped at 10% of the portfolio. And where REPP 1 was a hybrid of debt and equity, REPP 2 is geared towards credit and flexible debt rather than pure equity.
Ranking what is currently financeable, Hugues puts commercial and industrial first, on speed as much as credit, because a private entity selling power to another private entity produces good returns and moves quickly. Independent power producers come next, relatively low risk when well structured but slow because the offtaker is public. Mini-grids and isolated grids follow. Pure off-grid solar sits last, on the challenges the sector faces and the returns investors have seen from it to date.
No region may account for more than 60% of the portfolio, a cap Hugues describes as protecting against geopolitical, country and regional risk, and against climate risk, since droughts tend to affect a group of countries together and hydro projects with them.
Getting through the process needs a clear path to financial close, an experienced sponsor and developer capable of executing, and a business model that withstands scrutiny. Projects fail on bankability more than anything else, being too far from financial close, still negotiating a power purchase agreement, or without a strong backer behind them.
Asked what would tell him the market had changed by the end of 2027, Hugues called the timeline ambitious before answering. “Seeing commercial banks and commercial equity alongside DFIs in every transaction. That is what development finance is there to make happen.”
