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The Multilateral Investment Fund finances clean energy projects led by small and medium-sized enterprises in developing countries. MIF’s experience in Latin America highlights some prerequisites for the success of these projects: there must be a favorable regulatory environment, the fund manager must be experienced, the financial tools must be tailored to the context, etc. Donors, for their part, must fully play their role as catalysts for investment.

Because improving access to clean energy in Latin America and the Caribbean (LAC) is part of its strategy to improve access to basic services, the MIF has used Venture Capital (VC) funds to invest in small and medium enterprises (SMEs) since 1996.

Improved access to energy is needed in LAC as 40 million people do not have access to electricity, and 83 million people use traditional biomass such as wood and dung (IEA, 2002 and 2009). Furthermore, investing in energy efficiency could cut consumption by 10% over the next decade, saving USD 37 billion in deferred investments in new power generation (IDB, 2009). Developing high-tech sectors could also help diversify economies away from commodity-based business and generate jobs. However, making such an impact solely through VC investment is not possible as building infrastructure needs investment beyond the scope of VC funds. Yet, clean energy SMEs can make a difference by commercialising new technologies and responding to consumer demand.

According to the UN Environment Program (UNEP), in 2008, new VC/Private Equity (PE) investment in LAC totalled USD 590 million, of which USD 10.7 million was provided by the MIF (UNEP et al., 2009). Over 90% of this was invested in Brazil (the world’s largest renewable-energy market due to its hydropower capacity and established ethanol sector which has developed alongside its sugar cane industry) consisting mostly of PE for expanding ethanol production. Investment opportunities exist beyond Brazil, with countries like Chile, Peru, Mexico and Costa Rica making regulatory changes conducive to investment and/or developing their clean energy generating capabilities.

The MIF has played a catalytic role in attracting investment in the LAC, most notably in Central America and Andean countries that have problems accessing credit. The MIF‘s investments are leveraged with other Development Finance Institutions (DFIs), institutional investors and high-net-worth individuals at a ratio of about 4:1. Having invested in several clean technology companies in LAC, the MIF is today able to draw lessons from its experiences.

MIF – pioneer investor and supporter of clean energy development in LAC

The MIF was a pioneer investor in the area of clean energy VC investing in LAC. From 1996 to date, it has committed USD 18.5 million to seven VC funds that have invested at least part of their capital in clean energy, supporting 43 clean energy SMEs. About half of these are in Central America or Bolivia. The MIF has also been the anchor investor in four VC funds dedicated exclusively to clean energy. These investments have been made through different VC/PE funds, such as E+Co LAC, FLACES and CAREC, whose managers are all based in the region.

Initiated by E+Co, a US-based clean energy NGO, and with the help of the MIF , E+Co LAC was established in 1996, investing mainly in Central America, Bolivia and Mexico. Its capitalisation was USD 4.3 million, of which the MIF contributed USD 2.3 million. This was a pilot project that included the use of a revolving technical assistance facility for prototype development. Through this first pilot, E+Co gained expertise in managing funds.1 Despite the novelty of this pilot experience, E+Co LAC returned capital and a modest gain to the MIF.

Tecnosol, a renewable energy SME operating in Nicaragua, was one of E+Co LAC’s loan investments. It provides home solar energy systems of around 60 watts (W) at an average cost of USD 660, as well as low-cost wind generators and small hydro-energy generators for pumping and irrigation purposes.2 The company serves clients without access to an electricity network (e.g. in Nicaragua, 30% of the population do not have access to electricity) and those seeking energy savings.3 After E+Co LAC exited this investment in 2004, Tecnosol received investments through the MIF’s Social Entrepreneurship Program in 2009, and from CASEIF II, another VC fund where the MIF is an investor. These new investments have been motivated by the fact that unsatisfied demand could easily be served by Tecnosol, with appropriate adjustments and enhancements to its operational activities. Since its inception, Tecnosol has installed more than 48 000 renewable energy systems, benefiting over 280 000 people, and offset 1 539 tons of CO2. The company has 72 employees and has created more than 65 jobs.

E+Co applied the lessons learned from its early experiences when raising and managing its second fund, CAREC, which was not designed as a VC fund, but as a leveraged facility providing mezzanine-type financing for SMEs. The facility has a total capitalisation of USD 17 million, of which USD 5 million in equity has been committed by the MIF.

CAREC is one of the few financial entities targeting small, clean energy deals in Central America, which gives it a ‘first mover’ advantage but also subjects it to risks untested by other players.4 One of CAREC’s investments is La Esperanza, a 13.5 megawatt (MW) small-scale hydroelectric plant located in Intibucá, Honduras.5 In 2007, CAREC made a quasi-equity investment in the company to improve its infrastructure, providing electricity to 10 000 homes and creating 75 jobs in the process. The La Esperanza plant has reduced CO2 emissions by more than 90 000 tons, thereby creating additional revenue.

The MIF has also invested in energy efficiency through the FLACES fund, established in 2001 to invest, throughout LAC, in innovative SMEs operating as energy service companies (ESCOs) or using clean technologies to enhance efficiency and reduce emissions. The fund had a total capitalisation of USD 31.7 million, of which the MIF committed USD 10 million. FLACES had a major impact on ESCO, which was incipient at the time.

Optima Energia, an SME providing energy-saving solutions to hotels in Mexico helped jump-start ESCO in the country by financing and carrying out changes in energy consumption patterns (e.g., light savings schemes) in more than seven hotels, resulting in reduced energy consumption and costs. The savings realised by the hotels were used to pay Optima.

Lessons learned through experience

The MIF has broad experience and has learned important lessons pertaining to business expertise and choice of financial instruments.

Invaluable lessons have been learned and applied in business. An enabling ecosystem is key to successful investing and particularly important for VC/PE investment in clean energy (Figure 1).

Regulatory issues and permit delays can have an impact on clean energy investments, and several Latin America countries recently made regulatory changes. In 2008, Peru introduced legislation requiring that 5% of electricity production be derived from renewable resources over the next five years, including financial incentives such as preferential feed-in tariffs and 20-year Power Purchase Agreements (PPAs).6 Chile has approved legislation requiring electricity generators of more than 200 MW to source 10% of their energy mix from renewable sources, and Mexico signed a decree promising a national renewable energy plan, which could set the country’s renewable energy target to 16%. A USD 230-million fund will invest in projects from next year. Brazil, Colombia, Argentina and Peru are supporting the development of biofuels through legislation.

Experience has guided choice of expertise and partnerships. The quality of fund manager is the most important influence on the quality of a VC fund and its deal flow. The difficulty is combining positive social and environmental impact with financial returns. Fund managers must have both financial and clean energy expertise and be fully committed to becoming established in the VC industry. While NGOs generally do not make good fund managers, VC/PE funds can work in partnership by providing technical assistance. NGOs such as E+Co, however, have been able to become fund managers after learning from initial VC fund pilots. NGOs need to relinquish their grant mentality and become financiers if they want to succeed.

Knowing the best financial instruments to use comes from experience. Facilities combining grant-based technical assistance with investment can work well for clean energy SMEs and start-ups. The grant could be used to fund the development of promising concepts while preserving the capital and avoiding losses (if a prototype develops into a viable product, the company has to return the grant money to the grant facility attached to the fund). Used for E+Co in 1996 when the VC industry was nonexistent and replicated with other funds, this choice has been relevant, as out of 11 grants, only four returned some money back to the facility. The investment side, while investing in other clean energy companies, would have the option of eventually investing in concepts that could be effectively commercialised.

Clean energy projects tend to require significant investment. Although it is possible for VC funds to invest in smaller deals, larger PE funds tend to be better vehicles as they are able to leverage their investments.

Whereas equity is predominantly used in developed VC/PE markets globally, a mix of investment tools, including equity, quasi-equity and debt should be considered when investing in a young VC/PE industry. The reasons are that fewer entrepreneurs are familiar with equity investment and/or are willing to sell shares in their company to a VC/PE fund, and the regulatory and legal frameworks may not protect equity shareholders. Quasi-equity allows the fund manager and entrepreneur to get to know and trust one another, and delays discussions on the value of the company until the fund manager is more familiar with the company’s operations and able to value it more accurately.

Exits are also a concern in LAC as capital markets are not conducive to Initial Public Offerings (IPOs). A strategic sale to another company is the most common exit option. In a high-tech industry such as clean energy, global networks are vital to finding strategic investors and creating exit opportunities. Investing through quasi-equity is another option as this kind of deal is self-liquidating. This proved relevant for E+Co LAC when exiting from Tecnosol in 2004.

Being nascent in LAC, clean energy is still developing as an industry. Because DFIs and multilaterals have a role to play in building the industry, from the lessons mentioned above they should pay more attention to VC/PE funds, particularly in countries lacking a financial sector. Their catalytic role is essential to attracting private investors, often reluctant given the risks. Moreover, DFIs and multilaterals need to work with governments to improve the regulatory environment.

Entrepreneurs do not always understand the need for structure (boards with independent members, financial audited statements, certification processes) and equity as partnership, and would benefit from training and professionalisation. Universities and governments also need to fund more clean energy R&D so that more scientific findings and inventions with commercial potential are generated.


¹ E+Co now has funds in Asia and Africa, and has won annual UN and Clinton Giustra awards in recognition of their work.
² As sunshine hours are plentiful, solar systems represent more than 95% of company sales.
³ While the second category constitutes wealthy urban clients with environmental concerns, the first category constitutes poorer clients from rural areas with annual incomes below USD 3 000. Tecnosol agreed to ‘special programs’ with other institutions, i.e. the ‘Program of Solar Credit’, negotiated with the Minister of Energy and Mining of Nicaragua, where the World Bank provides a subsidy of USD 120 for each beneficiary of a 50 100 W solar system.
4 For more on this subject, refer to Duncan Ritchie’s paper in this issue of Private Sector and Development.
5 Honduras is one of the country’s poorest regions with over 30% of the population living without electricity.
6 A PPA is a legal contract between an electricity provider and purchaser, whereby the provider secures funding for a project, maintains and monitors energy production and sells electricity at a contractual price for the term of the contract.

References / IDB, 2009. Life in an Uncertain Climate, IDB, Features and Web Stories. / IEA, 2002. World Energy Outlook, IEA/OECD, report, Paris.  / IEA, 2009. World Energy Outlook, IEA/OECD, report, Paris.  / UNEP, SEFI, NEF, 2009. Global Trends in Sustainable Energy Investment – Analysis of Trends and Issues in the Financing of Renewable Energy and Energy Efficiency, UNEP, New Energy Finance report.