Encourage Solar Finance LLP has announced the first closing of a new private equity fund, Encourage Solar Finance L.P. at $40 million.

Encourage Capital is an impact investment asset manager and advisory firm, and the equity fund Encourage Solar Finance caters to the Micro, Small and Medium Enterprises (MSME) sector in India, according to a statement issued by the company. The fund has Goodwin Procter LLP as the lead fund counsel.

Specialized financial institutes in India will receive investments from the new fund to develop and scale commercial rooftop solar finance solutions for MSMEs.

The Government of India’s target of achieving 100 GW solar installations by 2022 includes 40 GW of rooftop installations. Encourage Capital, which conducted an independent study on the MSME market size for solar rooftop in collaboration with the Growald Family Fund and Climate Works Foundation, saw the rooftop solar market as having a 15 GW potential, with a $9 billion lending opportunity for financial institutions. The independent study found that by March 2019, only 3.5 GW of rooftop solar has been installed in India, the MSME segment being altogether neglected.

According to Mercom India Research’s newly released Q1 2019 India Solar Market Update, the cumulative rooftop solar installations reached 3,527 MW by the end of Q1 2019. Rooftop installations still only make up 12% of total solar installations and the country has achieved only 9% of its target (40 GW by 2022).

According to Mercom India Research analysts, lending has become challenging over the past couple of quarters, contributing to slower growth. Net metering is still the biggest area of concern in the rooftop market as DISCOMs make implementation difficult fearing revenue loss.

Adam Wolfensohn, Managing Partner and Chairman at Encourage Capital, said, “With increasing energy demand, high electricity prices and decreasing costs of solar, MSMEs can find rooftop solar to be an attractive low-carbon solution for their electricity needs, but financing is still a key barrier.”

MSMEs account for 45% of India’s industrial output and nearly 30% of GDP but face a credit gap of $230 billion in India, which limits their growth, according to the release.

Ameya Bijoor, Partner at Encourage Capital, said, “For investors seeking a market-rate return while creating deep and systemic impact, rooftop solar finance for Indian MSMEs represents a large, underserved and attractive market opportunity.”

Encourage Capital, which was formed in December 2014 through the combination of Wolfensohn Fund Management, LP (WFM) and EKO Asset Management Partners, LLC, seeks to complete its final closing of Q4-2019 with a target of $75 million and a hard cap of $100 million.

In the recent past, Encourage Capital through its prior fund, Wolfensohn Capital Partners LP, has successfully invested in and exited several high-quality financial institutions in India, including DCB Bank, Ujjivan Financial Services and Repco Home Finance, the release has informed.

KfW also has a long history of promoting sustainable development in India, particularly in financial inclusion and renewable energy.

Mercom had reported that the rooftop segment in India is still relatively small and new, with banks not comfortable in lending to these projects. That said, various Indian banks are disbursing concessional loans to the rooftop solar segment to assist the government in achieving its rooftop solar target.

Recently, Mercom reported that the 2018 edition of the joint report on climate finance by the world’s largest multilateral development banks reveals that nearly $43.1 billion was allocated to developing and emerging economies in 2018 to boost projects that help these nations cut down on emissions and address climate risks, especially after the adoption of the Paris Agreement in 2015.

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