In 2020, Hivos-Triodos Fund achieved its goals and repositioned itself to strengthen investment in small and medium-sized enterprises (SMEs) active in sustainable agriculture and renewable energy. Karel Nierop, Hivos-Triodos Fund’s Fund Manager says that his trust, energy and ambition to build on past successes was reinforced during the year: “We are exploring the idea of actively pursuing growth through external fundraising and invite new investors to join us. We have an impressive track record, great success stories and financial stability. We have a pipeline of projects and can leverage on our 25 years’ experience. We are poised for growth.”
Performance and impact of COVID-19
During the year, Hivos-Triodos Fund, like many other funds, was not unaffected by COVID-19. Nierop tells: “The energy portfolio of the fund was impacted by a so-called triple whammy effect. At first we had a delay in supply of solar technology that comes mostly from China, which halted imports. Then there were movement restrictions in most countries, which really hampered sales. And after that, even when the restrictions were lifted, buyers had become very cautious, fearful of an uncertain economic outlook.”
Nierop says that he is proud of the many early stage companies in the fund’s portfolio: “I was really impressed by their resilience. We stood by our investees by renewing and restructuring loans, refinancing them to keep them operational and not create additional stress, and there is actually quite some momentum to start growing again. Sales are again on the rise.”
In response to COVID-19, grants were provided to several portfolio companies in Peru and Nicaragua, where social systems are weak: “Grant-giving is not something we commonly do, but some of our investee companies approached us to help with direct COVID-19 relief funding. Our investees were able to use the money to buy food packages, water and blankets and distribute them into many communities using their distribution networks. Being deemed an essential sector, they were not subject to movement restrictions. Thousands of people were reached this way.”
Looking purely at financial performance in 2020, results were negative, which Nierop says is due to currency effects: “We use US dollars and local currencies to provide loans to entities, but the fund is set up to mitigate the currency risk through strong buffers, and these are, to date, paper losses, not cash. Our investors receive a fixed interest payment on the loans they provide so they were unaffected.”
Creating impact is a crucial strategic focus of the fund and in 2020 a theory of change was created in collaboration with consultancy firm 60 Decibels. It describes three pillars that contribute to a green inclusive economy, specifically Balanced Ecosystems, Inclusive Prosperity, and Inspiring Change. Impact metrics were also created and are integral to the fund’s value proposition. Local partnerships remain a key part of the implementation approach, and the geographical parameters remain the same, with strong emphasis on sub-Saharan Africa and Southeast Asia.
The investment focus on direct investments in high-growth, niche and dynamic ventures will turn towards those that address the effects of climate change, global warming and the impacts on agricultural production: “We want to create better access to basic needs,” he says further. “It’s obvious that food is a necessity, and agriculture is the prime sector for employment in developing countries but providing access to energy is the added value that enables self-sufficiency and innovative solutions.”
“We are especially interested in solutions on the nexus of agriculture and energy, like solar irrigation and solar cold storage. We want to invest in early stage companies to bridge that gap before commercial or more risk averse investors are willing to step in,” says Nierop. The fund will also continue to indirectly provide access to finance to green MSMEs via investments in microfinance institutions and funds.
Preference for off-grid solutions
Developing markets are focusing on what infrastructure to build, if any at all. Nierop says: “Renewable energy will be the fastest growing segment in the energy sector in emerging markets, and there are two different types of energy solutions: on- and off-grid. On-grid solutions, like utility scale projects or hydropower plants are connected to the grid and supply energy to cities and communities. Off-grid solutions are captive; not connected to a national grid and more focused on distributing their energy to one community, one household or one SME.”
Hivos-Triodos Fund catalyses the development of the off-grid segment: “The role of off-grid energy is underestimated. I expect it to be the most viable source of energy for hundreds of millions of households globally. As part of this, we are now seeing the evolution of the mini-grid segment, and it is on the verge of taking off. It’s going to be massive and is something we want to be a part of.”
Support for mini-grid systems
According to Nierop mini-grids are what really needs to scale up and mature: “A mini-grid is basically a captive energy solution that connects more than one user. A 10-panel solar project could stand in the community and connect several households. Mini-grids have a larger capacity in terms of energy generation than individual solutions and can be based on different technology, but solar is by far the most dominant in emerging markets. The cost advantage over utility projects is that the energy consumption occurs at the source, which minimises transmission costs.”
Hivos-Triodos Fund already has one such project in the pipeline, a mini-grid facility in Nigeria. Several solar mini-grids will connect energy to hundreds of households: “It’s a collaboration with Triodos Groenfonds and is being backed by the World Bank by means of results-based financing. If the developer is successful in connecting households to the project, it will receive a form of subsidy. It’s de-risking for us, because we’re not relying on individual households to pay their energy bills without an energy utility in between, which is what typically hampers developers from scaling up. Having a results-based financing scheme is highly valuable. I’m hoping it will happen more often to prove these types of investments work and that subsidies can eventually be phased out.”
Interest in circular economy solutions
Nierop believes some of the most interesting companies for the fund in the coming five years will be ones that operate on the nexus between agriculture and energy, companies like its recent investment in GPS Renewables. The company was founded by two young graduates from an Indian university and is now selling its products into developed markets and large global companies are showing massive interest: “It developed technology to capture biogas from food waste on a larger but captive scale, and is currently in use in universities, larger companies and hotels, providing a stable source of biogas for cooking. The surplus gas can be converted into energy for own use or could even be distributed. It’s a true circular economy solution.”
After 25 years, Hivos-Triodos Fund looks set to build on its successful legacy by providing broader access to finance for SMEs. Nierop says: “Small and medium-sized enterprises are the drivers of innovation in any economy, and they are the ones who will develop new green solutions and create more resilience in energy and agriculture in the developing countries we work in. They are key to building a green economy.”
Explore Hivos-Triodos Fund's impact reports 'Green, inclusive growth in emerging economies' and ‘Catalysing green, inclusive growth in emerging economies’ to find out more about our role as investor in the energy and food transitions. The reports present our 2020 results in a context of numbers and stories and showcases our mission to make money work for positive change.