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Q & A on Energise Africa Risk and Returns
We’re sharing an informative Q&A piece to help to answer some of the key questions about risk and return when investing via Energise Africa.
Our community of investors are helping to make incredible things happen, funding businesses that are creating a real positive impact on people and the planet in emerging economies. At Energise Africa, we are transparent and upfront about the risks of these direct investments.But we want investors to feel informed about how much risk there is and what can actually happen to their investment if things go wrong and, importantly, what role we will play to ensure the best outcome for investors if the worst does happen. Energise Africa has always been committed to transparency about the activities of our borrowers and their financial situation.
As a crowdfunding platform, our drive is getting these impactful businesses access to the financing they need with the clear intention that our investors receive their invested money back with interest. However, we are very clear about the potential risks associated with this type of investment and that investors should not invest money that they could not afford to lose.
Many of our investors have questions about the process that occurs if a business is unable to make repayments as planned. So, we’re sharing an informative Q&A piece that has been prepared by our investments team to help to answer some of the key questions.
Q: How do repayments work?
Borrowers (the businesses featured on the platform) enter into a contract with Energise Africa in which they are allowed to place new loans on the crowdfunding platform. That contract also specifies the term, interest rate and repayment frequency of each loan. Most loans have a total term between 12 and 36 months, and the repayment frequency is usually every 6 months.
Sometimes, the borrower may take longer to make the first repayment (a so-called grace period). This allows the company to grow before having to make their first repayment. When the repayment is made, the interest accrued up to that point is also paid.
Borrowers are expected to transfer the scheduled repayment and interest during the first 10 days of the month. Energise Africa transfers the amounts to investors' wallets no later than the 15th of the month.
Q: Are there risks associated with crowdfunding?
Any investment involves risk. With crowdfunding through loans, there is a risk that the borrower will be late in making repayments and interest, or not repay at all. Commercial banks often do not finance growing businesses that are not yet profitable or only agree to do so when the borrower has valuable collateral such as land, buildings, or machinery.
In contrast, Energise Africa generally lends to fairly young and promising impactful businesses that, by definition, operate in emerging economies. These are countries that often face relatively significant economic and political challenges. Therefore, despite extensive screening and monitoring, the projects can generally be considered an above-average risk.
As an investor, you can assess the risks by:
- Looking at the return: as goes for investments, as for Energise Africa projects - the higher the expected return, the higher the risk
- Downloading and reviewing the offer document for each project
- Review the Risk Warning section of our website
- Read the Risk Summary on our website
- Review our comprehensive outline of the issuer's repayment histories in our Portfolio Overview
Q: How does Energise Africa mitigate the risks for investors?
Energise Africa tries to mitigate the risks through a comprehensive upfront risk analysis reviewed by an external credit committee consisting of financing experts. Financial agreements are then made with the borrower that they must adhere to. The borrower must report its financial status to the Energise Africa Investment Team each quarter. Borrowers are typically required to provide collateral or another form of security to Energise Africa. This means that in the event of bankruptcy, the trustee can make the collateral available to Energise Africa, or can simply mean a stronger negotiating position compared to other lenders.
The contract with the borrower specifies the financial requirements the company must meet on an ongoing basis. Before receiving funds from each individual project, the company must certify that it is still in compliance with all financial agreements and provide a quarterly list of financial and operational KPIs. In the event a borrower no longer meets the agreements and/or the company's KPIs are deemed too weak by our Investments Team, the borrower is (temporarily) not permitted to raise any new projects.
Borrowers deemed to be higher risk may also be restricted to shorter-term borrowing (6 or 12 months). The borrower's contract expires every two years, and a new review of the company must be conducted by our Investments Team before the borrower can offer new projects on the platform. Borrowers must also have a 'track record'; they must already have an established presence in their target markets. This means for instance a solid credit portfolio and enough buffers and equity to compensate for unexpected downturns.
Energise Africa also checks the organisational structure of the borrower and how robust their internal procedures are. Finally, the loans that the borrower receives via Energise Africa must be in proportion to their total balance sheet.
Q: What could be the causes of delayed repayments?
There could be many reasons that mean a borrower needs to delay repayments, including:
- Lower revenue growth than projected;
- Higher costs than forecast;
- Less successful in raising equity or debt financing;
- Weakening of local currency, making loans in pounds (£) relatively more expensive;
- Deterioration in repayments from the borrower's customers (sometimes called portfolio quality) can also make it more difficult for the borrower itself to repay its loans.
Q: Can borrowers still offer projects and borrow new money while they have not yet repaid previous projects?
Borrowers must meet 3 conditions to offer new projects:
- They must not yet have reached the total maximum loan amount that was agreed to in advance.
- They must not be in arrears on repayments from previous projects.
- They must still meet the financial ratios we have agreed with them.
Q: What are restructurings?
If the borrower is no longer able to meet the agreed repayments and interest payments, Energise Africa enters into discussions with the company's management to see what is possible. The least complex solution is to agree to delay the repayment schedule for a few weeks or months. This may be permitted if there are short-term aims that the company can realistically meet, such as allowing time for them to raise money from other sources or make internal cost savings to comply with the agreed payment schedule. But, no matter how good the intention is, sometimes a delay is not enough for a company to survive. In loss-making companies, capital from existing or new shareholders must be raised at some point to fund staff salaries, overhead costs as well as working capital.
The moment existing or new shareholders are asked to bail out a company, they will have to be convinced of the long-term prospects of the company in question. In doing so, shareholders would like to see their capital used to strengthen the company and achieve growth in order to achieve a position of profitability in the long run rather than to repay existing debt. Consequently, in such a scenario, they will demand that lenders waive repayments and interest payments for a longer period of time, or that they write off part of the outstanding debt, or that instead of the current repayment schedule, a new schedule with lower periodic repayments spread out over a longer period of time is introduced.
Often the solution is a combination of these elements in which, ultimately, the company, existing and new shareholders, and lenders must all agree after lengthy negotiations. This is a complex process, and the outcome is determined by the relative bargaining power of the various parties. Often this process takes months. Energise Africa conducts these conversations on behalf of the crowd and always tries to write off as little as possible, even if that means, for example, waiting longer for repayments. In addition, we strive to find a solution that is reasonable for the business, so that the local impact the business creates, which is the original reason for Energise Africa to provide the business with financing, is maintained.
Q: Do bankruptcies also occur?
Unfortunately, bankruptcies occur and will result in a partial or total write-off of outstanding borrowing and interest to Energise Africa investors. Once a borrower cannot meet its payment obligations to Energise Africa, Energise Africa itself can place a claim and thus initiate the bankruptcy process. However, this is generally not our preference, as the returns to the crowd from such a process are highly uncertain (and they are lengthy processes). Moreover, it usually deprives the company of the opportunity to restructure and pick up where it left off. So we generally opt for restructurings first to keep the chances of repayments as high as possible for the crowd and to give companies every opportunity to continue creating impact. Energise Africa does not have this process entirely in its own hands as the borrower will likely have other lenders, as well as suppliers, the government, or employees, that can eventually declare them in default and thus start a bankruptcy process.
In respect of your investment, Energise Africa will only write off debt when there is either a formal bankruptcy or when we have formally agreed to (partially) write off the debt in a restructuring process. Such a restructuring process can also take place at the moment a new buyer/investor wants to take over the (nearly) bankrupt borrower and requires existing lenders (such as Energise Africa) to write off all or part of the outstanding debt. Energise Africa then has to choose between letting the company go bankrupt (with a high chance of being left with nothing from the bankruptcy process and the loss of jobs and impact), or accepting a (large) loss, but allowing the company to restart. This is a very difficult choice for us to make.
Q: What are the lessons learned? Are additional measures needed?
It is clear that direct investments in young impactful companies in emerging countries are, by definition, 'higher-risk' investments. The companies that have already 'made it' no longer need Energise Africa. They can get much larger financing on more favourable terms elsewhere. To give opportunities to young impactful companies, we will, unfortunately, have to accept that there will occasionally be companies among them that cannot make the growth plans come true and will either fall behind on their repayments or not be able to repay them at all. There are several measures that can be taken when lending to these types of companies.
These include:
- Requiring higher solvency from the company at the beginning of the partnership;
- No longer lending to parent companies / holding companies but only to the operating entities;
- Requiring collateral at all times;
- Offer shorter maturities;
- Provide access to the Energise Africa platform for shorter periods of time;
- Charging higher interest rates.
The consequence of these measures will be that, unfortunately, fewer - potentially high-impact - direct investment opportunities will be offered. In the longer term, it does ensure a more balanced, higher-quality portfolio.