Hydropower in Costa Rica, biogas in India and cookstoves in Ghana. Call it microfinance 2.0--the "missing middle" meets clean energy. By supporting small and growing businesses that distribute clean energy, E+Co has been a key catalyst in simultaneously reducing poverty and cutting carbon emissions in 20 countries in Asia, Africa and South and Central America. In 2008, the Financial Times named it Sustainable Investor of the Year.

But now, headed by a new management team, the pioneering clean energy fund is restructuring from nonprofit to for-profit status and from offering mostly loans as a venture debt fund to private equity.

And now it has a new name, Persistent Energy Partners, with offices in Ghana, Tanzania and New York. Furthermore, it is narrowing its focus to Africa where it hopes to finance entrepreneurs that grow companies of substantial impact.  

"After years of home solar investing in Tanzania, penetration is estimated at less than one percent," says Chris Aidun, Persistent's new CEO and E+Co's former pro bono counsel. "If we can prove that some models work--socially, environmentally and financially--we think significant capital will flow to providing energy for the bottom of the pyramid.

"Look at what mobile phones did for Africa," he says.   

"It's not an easier model, but we think it's a more effective model," adds Bruce Usher, Persistent's new executive chairman and a E+Co board member.

Late this month, E+Co completed a restructuring whereby it wrote off nearly half its $28 million portfolio and transferred remaining assets in Asia and Central and South America to other fund managers. Under the plan, which it negotiated with five institutional creditors representing 80% of its debt, led by the International Finance Corp., the firm's debts will be cancelled in exchange for a percentage of collected debts plus a stake in remaining assets. The firm's other creditors, holders of E+Co's "People and Planet Notes," will receive their pro-rata shares.

According to Aidun, a portion of E+Co's remaining African portfolio will be put into a fund with a six-year term. Representing investments in solar energy, cookstoves and liquid petroleum gas, this "core Africa" portfolio consists of about $5 million of investments in Tanzania, Uganda and Ghana. Since the portfolio is "mature," there will be a one-year investment period and a five-year harvest period, and projected returns will depends on investor appetite.

"If we knew we could raise a 1% to 3% fund, that would be great because we could be more aggressive and probably do a better job with the mission," Aidun says. "But if there isn't a community of investors who want to be that aggressive, then we will change the design and work toward higher yields."

Energy Through Enterprise
Sparked by a research project at the Rockefeller Foundation, E+Co was launched in l994 based on a paradigm-shifting idea: if you are concerned about the global environment, you have to be concerned about energy, especially in the developing world.

E+Co's vision for how to resolve this issue was equally revolutionary. Rather than deliver energy via large-scale utilities, it advocated a bottom-up approach. Arguing that distribution rather than technology was the issue, it identified local entrepreneurs as an untapped resource. And instead of relying on western experts, it hired locals to support the small and growing businesses that could distribute clean energy to their communities.

The successes were many. In 2006, for example, it made a loan to Toyola Energy, Ltd., a company in Ghana that manufactures and sells energy-efficient cookstoves that replace charcoal, wood or dung. Toyola has since sold more than 250,000 cookstoves, and each one eliminates five tons of carbon emissions that E+Co helped the firm monetize by selling carbon credits to Goldman Sachs.

E+Co's model had a heavy emphasis on technical assistance to its borrowers by helping with market assessment, business plans and the like. It followed up with seed loans ranging from $25,000 to $500,000 at 8% to 12% and expansion capital later on. An independent investment committee made up of financial professionals approved all loans.

According to co-founder and former CEO Christine Eibs Singer, who left the fund in January, technical assistance was the firm's top risk mitigation strategy and a necessary component to its success. But it cost 30 cents for every dollar loaned in seed capital. Since it was not funded by grant dollars, E+Co typically could not recoup this investment until a later stage in a company's development when it sought expansion capital, which was both lower risk and more profitable for E+Co.

In fact, Singer had complained for years that E+Co itself never had the working capital it required. But not until early 2011 did the fund's board begin to have concerns about the fund's loan portfolio.

"Repayment rates were dipping, and the data was inconsistent," Usher says, describing the red flags. "There was staff turnover, and a lack of information [regarding] what was really going on in the field."

The fund, meanwhile, was in the throes of building a new private equity platform. Singer invited Aidun, whose legal practice was private equity, to join and oversee the effort.

In November 2011, Aidun officially joined E+Co as co-managing director, alongside Singer,  and was charged with overseeing administration, finance and investments. At the board's request, he, along with the new CFO and CIO he had hired, took a deep dive into the organization's finances and portfolio.  

"When we took over the portfolio, we immediately knew there were some big losses," he says. "We went straight to the lenders and said we cannot certify that we are in compliance with the covenants. [We said] we're starting to examine the portfolio, and when we're done, we will come back and tell you more."

The trio concluded that with approximately 140 investments in 90 companies in 20 countries with an average value of $200,000, the complexity of the fund's portfolio had outgrown its financial systems.

"They didn't really have a good handle on the timely basis of their financial performance," Aidun says. "We realized they were rapidly approaching a liquidity crisis, and they were about to breach many of their lender agreements."

Singer disagrees, claiming that E+Co's main creditors knew that small and medium enterprises often delayed payment. "There was an understanding that a traditional 30-60-90-120 day accounts receivable report was not a realistic assessment of the portfolio," she says. "Staff analysis had shown that more than ¾ of those that had consistently paid late eventually paid off."

"This had been deemed 'mission acceptable,'" she points out.

According to E+Co's 2010 tax return, the IFC granted it a five-year extension on the principal on its loans, until 2018. With $18 million in loans outstanding, the IFC was E+Co's largest creditor.

After conferring with the Board about how to save E+Co,  Aidun says, the fund approached senior lenders and asked for a ten-year moratorium on the nonprofit's interest and principal payments. Thus began negotiations that almost ended in the fund's liquidation, but where all its remaining investments will now be managed out.

"The takeaway for E+Co is that if you don't focus on the financials, the mission is never realized," Usher says. "Mission's important, financials are important. But one comes first, frankly."

Persistent is pushing forward with lightning speed. "We have just made two investments," Aidun writes in an email from Africa. "If you understand them [Off-Grid Electric and Devergy,] it will help you to understand what we are looking for."   

A former investment banker, Ellie Winninghoff is a writer and consultant specializing in impact investing. Her writing about impact investing is linked at her blog, www.DoGoodCapitalist.com, and she can be reached at: ellie.winninghoff (at) gmail (dot) com.