Your solution to notorious problems with mid-market project finance

In3’s CAP funding overcomes four of the main challenges with quickly, reliably securing project finance

The In3 funding program provides a bridge over the “troubled water” (sometimes shark-infested) associated with securing mid-market project finance. The traditional route looks, on the surface, like a straight shot, but the reality is anything but — inherently slow, unpredictable and expensive. But there’s no time to waste solving the pressing needs of our times — climate change, water and food insecurity, net zero and carbon-negative energy, affordable housing, … building a healthier and more sustainable world.

Accordingly, we have developed and extensively tested an innovative structure that relies on Completion Assurance guarantees (more), called Completion Assurance Program (CAP funding). This program is not for everyone, but it does solve many of the more common problems with the traditional route. When does it make the most sense?

Who is CAP funding for?

Have you encountered any of these four problems?

What specific problems do we solve that plague traditional project finance, and how have our innovations been proven, standing the test of high-stakes foot traffic, in order to close the distance between those with investible capital and those who actually get funded?

1. The exact qualification requirements for funding are unspecified … project finance qualification is often a “slippery slope” that falls somewhere between inefficient and tail-chasing, and can be extremely frustrating. Everything seems a “go” at first, but then falls apart at the 11th hour with most traditional project funders. Why? Uncodified standards (where the exact requirements reflect unique characteristics of the funder), without sufficient aforethought by the funder to organize and convey do’s and don’ts.
2. Developer/owner has already invested all available cash and/or does not want up-front fees, thus seeks 100% financing, also called “full leverage” financing, at reasonable terms (without giving up control). Some developers/owners still have further development steps before ready for construction but they have run out of available cash. Developers may or may not have good credit.
3. The need for speed — due to numerous previous attempts (perhaps amplified by 1 and 2, above), or just because a lot of careful preparation work has already been accomplished, and patience has run out, time is of the essence!
4. Lack of alignment on the teamwork for project delivery. Disputes between the developer and hired EPC or construction firm can get in the way of completing the assets on time and within budget.  Lack of aligned incentives cause problems or delays that are completely avoidable. All parties need to keep their eyes on the prize.

These problems are all avoidable — solved by virtue of a unique structure that redesigns project finance from a type of adventure capital to more like a science, shuffling the risk/reward equation, making it more predictable, faster, easier and just better.

Problem 1:  Mid-Market project finance is an expensive “slippery slope” that may ultimately lead nowhere.

Even with highly reputable investors, securing mid-market project finance at reasonable terms is typically a long, challenging and expensive proposition.  Most financiers won’t know how long they will take to decide whether or not they will make a binding offer. They’ll tell you that it depends on you, the project owner, but even if you approach them with a strong project, they will usually express initial interest (if not enthusiasm) that later falls apart when they find perceived issues, whether or not duly disclosed. It is nearly impossible to properly disclose all areas of potential concern (from garden-variety suboptimal contracts or market dynamics to outright defects or “exposures” they happen to find problematic) let alone avoid all downstream issues because, although project investors share common characteristics, there are also sharp differences (some would say quirks) due to the vast diversity of human reasoning within the project investment ecosystem.

For more on this last point, see the bestselling book, Psychology of Money that begins with the premise that nobody is crazy, even though it often seems that way.

Certainly, well-established standards exist in most industry sectors, such as low-carbon renewable energy, where a robust, long-term offtake agreement with a creditworthy customer is strongly preferred, for example. But there are a few dozen other factors that are more open to interpretation — is the market subject to inflation/deflation pressures, with year-on-year changes lead to disruption as innovative new solutions reach scale, is the site secured without “big surprises” lurking beneath the surface of the dirt (has there been a proper geotechnical study performed), are all vendors and the EPC firm involved reputable, O&M plans and accounting rules upheld, etc. Long list of potential concerns.

Because of the initial, superficial “yes,” hopeful developers/owners and promoters easily gain false security (optimism that there is a path to secure funding for the project at hand under reasonable if not competitive terms & conditions) that eventually gives way to the harsh reality that, too often, developers and investors do not see eye-to-eye. Allowing for “neurodiversity” (per the earlier “nobody’s crazy” assertion) is necessary, but can be incredibly frustrating. An investor’s so-called deal-killer (almost always about perception of risk, not potential reward) can be seen by developers as arbitrary or even just plain wrong. What’s wanted, and what In3CAP delivers, is a fast and clear “yes” or “no” response, to avoid the dreaded “slow yes” (actually a “maybe” at best) because later, after massive time and energy has been poured in, it abruptly becomes a “no” without offering a referral to another capital source that would be a better match.

How do qualified developers with strong proposals meet credible new funders? Yes, the Internet and referrals from trusted professionals help lower this inherent barrier, but along with the gratification of “instant contact” (such as via LinkedIn) comes increased odds that the party reached will take unfair advantage (attempt to exploit vulnerabilities) of the inherent mismatch between the party seeking capital and the ostensible source of funds.

This unfortunate dynamic occurs more often than casual observers realize, ranging from the garden-variety challenges of negotiating and doing one’s homework to quickly recognizing patterns that are sure signs the other party does not deserve further attention. If there was a 3-catagory scale for this, with Category A is where you should put 80% of your time, the gradations could be named as follows:

Not so with CAP! None of the above ABC’s apply because we definitely “publish” our guidelines, within an exceptionally broad mandate, streamlined thanks to a Completion Assurance Guarantee (CAG) or cash deposit, and because we charge ZERO upfront fees when the client facilitates said guarantee, and due to (A) and (C), the conditions for investment are verifiable, finite and known in advance, so as long as due diligence checks these boxes, we can offer a more meaningful (less superficial) initial “yes” or fast “no” without wasting anyone’s time — yours or ours.

In other words, a problem that plagues other funders (and thus inherited by the owners of deals they consider for funding) is entirely avoidable with CAP’s pre-qualification process, designed to uniquely solve this pernicious blind alley. We offer a pre-qualification step right from the start that quickly determines funding feasibility to bypass this guessing game. We then commit to reach closing (if the project’s representations are true and correct) within 30 days — often just 2-3 weeks. It is important to understand this is not just aspiration or a policy of ours — it is the natural result of our innovative structure, a design advantage.

Without something similar, the traditional route presents a serious problem for both parties — the developer’s main risk (if their deal is refused by others, or they just cannot qualify for off-the-shelf financing through a bank, etc.) becomes hunting or chasing the money. This is not a sprint, but a marathon, where the finish line keeps moving. Why? Most of the time developers find false security with investors that won’t offer constructive feedback (to avoid getting into a dispute due to the aforementioned lack of shared risk evaluation), so developers wait for feedback or next steps. But when following the twists and turns of investor perception, like some protracted job interview, time passes as significant effort goes into answering seemingly endless questions.

To be fair, investors also risk time and expense with their screening, incremental qualifying, and (if the deal survives) due diligence, which represents a significant cost of doing business. Some investors charge a fee for this, requiring the developers bring their “A” game. The net effect is, unless successful on the first few tries, the party seeking funding (by definition, having less liquidity than the party offering funding) runs out of “unexpended” funds, but also drains the “social capital” (patience, mostly) needed to go the distance.

This is why we recognize the occasional need for 100% financing, the next problem/solution described below.

Why are “serious” issues, as perceived by investors, surfaced during due diligence, so often “undisclosed” by the developer? Because, frankly, few developers can read minds — it simply isn’t practical for even highly skilled developers to anticipate every nuanced interpretation of risk, every possible downside, every eventuality. You may have already attempted that, as many do, but investors have their own agenda, which is remarkably diverse, hard to predict and probably will seem irrational to you. It is born of their experience, and often becomes part of the investor’s DNA and traditions. (That said, an objective risk analysis by the developer team is always appreciated, and also surprisingly rare, as developers are reluctant to spend much time or money on thorough downside planning.)

Perception of risk depends on the audience: one investor’s “white knuckled grip” on a deal’s remaining risks — seen by them as a serious deficiency that is hard to mitigate — can be another investor’s unconcerned “sweet spot”. Investors sometimes focus on a differentiated niche that fills a gap left by other would-be capital providers, either due to inherent risk (early or late-stage, emerging markets or industries, unusual deal structures, etc.) they can mitigate, or risk that can be accepted because it aligns with a particular fund’s “investment thesis” (the contractual arrangement with their partners), making it a sin to invest outside that mandate. Either way, whether a matter of risk appetite (akin to taste or style, of near-infinite variety) or due to the designated purpose of available funds, this diversity supports a vast array of capital providers in seek of quality dealflow, … but how, exactly, are you supposed to know if your particular deal hits the mark?

Most just ask if the investors within reach are interested, but don’t realize they’re in a blind alley, where a “no” indicates nothing of use to improve their pitch or plan, and how much time and energy did it take just for clarity? With persistence and skill (and luck), one or more termsheets arrive, problem-solving ensues, and you get creative if the offers seem unreasonable. Risk/reward interpretations are hard to change. They’re designed to make sure they don’t lose and often to maximize their own self-interest, born of fear and/or greed.

As a result of this challenge, investor and developer perception can diverge greatly over simple things. This diversity of perspectives is fortunate, in a way, but can also be like searching for one’s capital “soul mate” and getting half way pregnant before noticing fundamental incompatibility. Disagreements about perceived risk/reward (net value of future performance, discounted to reflect their perception of what could go wrong) that turn into irreconcilable differences are sadly common. Due to this complexity, and to avoid a non-productive argument, too many investors won’t comment on what they perceive, they’ll just say “pass” to most deals in front of them. This deprives the developer with a chance to learn how to improve. But the braver investors will relay their concerns and sometimes (if they see the situation as workable) attempt to negotiate.

Traditional project investors sort through dozens of opportunities and evaluate, to the best of their ability, seeming anomalies or problems, ranging from “big red flags” (hopefully none of those will be found, as their perceived severity greatly limits cooperation), to items they consider more garden-variety issues (a missing permit or contract), sometimes surfaced mostly to gain an upper hand for negotiating terms. At other times, investors simply seek to understand whether or not the project warrants further discussion. All of this adds to mutual costs, and delays investors from “cutting to the chase” to make at least an indicative if not binding offer.

To developers, this may seem like they’re picking on certain facts while completely ignoring a project’s uniqueness (innovative differences and sometimes advantages), which often provides the key to its value and virtues. Certain investor “hot button” issues, if identified at all, can seem entirely irrational to project developers and promoters already familiar with the strengths of their deal. This communication gap is legendary — and also quite solvable, thankfully.

Examples of this conundrum, based on patterns we have observed (they usually unfold just in time to provide 20/20 hindsight):

a) Early (albeit superficial) KYC concerns, like a lack of recently-prepared and audited financial statements. Such statements may seem a mere formality, but they are widely used to tease out whether or not the developer has a track record of success or is in some sort of financial trouble.

b) More substantive concerns expressed by analysts such as fears that competition could erode margins over time and ruin performance.

c) Financial model assumptions, including how tax equities or other incentives are accounted for. This can make IRRs look much better than they really are. Careful review of MS Excel models reveals that the standardized basis for many calculations is anything but standard.

Its hard to predict what investors will object to, even when you have studied and feel that you know their history (assumes you’ve done your homework and analyzed the previous deals they funded, via reviewing their investment portfolio, stated thesis, etc.), which makes for cat-and-mouse dynamics that are best avoided in the first place, and would be entirely “optional” but for the fact that project funds are urgently needed. Quite often the project at hand is merely the “tip of the [melting] iceberg” with substantial pipelines of deals waiting for the right investor to come along. That said, investors are less interested in what could be funding next; the focus must be on the deal at hand and nothing else.

Some investors (including In3’s capital partners) don’t let this diversity of criteria become part of how they interact with prospective investees at all. What is a given investor’s deal killer can seem arbitrary or just confusing to those who are unprepared. The potential upsides are usually the main thing developers see, while investors have to weigh the potential downsides and seek to mitigate every significant risk. Developers that go the distance do not run into as much of this “tuna surprise” effect (where you don’t really know what you’ll get), but bridging the communication gap between developers and investors is never an exact science.

Why does this tend to happen? For one thing, investors have the funds, and you don’t (yet), so the playing field is inherently unlevel. Second reason: because you let it happen. There’s a design problem, born of the fact that investors and their banks won’t be criticized by their employer for NOT funding something, thus there’s an inherent incentive for investors to keep digging until they find a fatal flaw. Fortunately, that’s not true of us. We find a way to make it work, a refreshing, more entrepreneurial approach, that in practice constitutes nothing short of a project fundraising redesign.

How does this work, in practice? We won’t get hung up on the “small stuff” like traditional investors sometimes do. Shovel-ready status, the oft heard phrase, may not really exist. There’s rarely to never 100% complete readiness to turn dirt, if you look closely enough. Reputable investors like Development/Multilateral Finance Institutions (World Bank IFC or the various regional development banks), or even traditional impact investors, tend to pick apart the plan’s details, fixate on any perceived irregularities, such as lack of complete permits or other missing documents seen as sacred to completing due diligence. We’re not bothered by any of that. 

With conventional funding sources, the only way to avoid playing this game, which is remarkably commonplace even with quite professional and otherwise effective impact investors, is to simply not arrive at the playing field. Pick a different venue. In3’s CAP handles this via a pre-qualification “test run” and a reshuffling of the risk of project non-completion — transferring a portion of that responsibility to a project’s guarantor:

Solution 1: Radically improved funding certainty – we know extremely well what our partners want to finance, and their likely, contract-ready terms & conditions.  We ignore debt-to-equity, liquidity, and debt service coverage ratios.  We are unconcerned about stage of readiness. We can usually get a binding offer in 2-3 weeks once we submit the pre-qualified package.

Our use of a completion assurance guarantee combined with an innovative pre-qualification process makes financial closing radically more certain, with a commitment available in 30 days or less that will, upon contract execution, automatically deliver all the contracted funding per the project’s monthly draw schedule.  Not sure if you pre-qualify? Ask us or see How to Qualify

Problem 2: Developers have already invested all available cash and/or do not want up-front fees, thus seek 100% financing at reasonable terms. The need for 100% financing, sometimes well ahead of shovel-readiness, without giving up control or too much owner equity, is a notorious and growing challenge. Being under-capitalized is the natural result of developers who invest all available cash, especially the case when starting a new line of business, entering new markets, commercializing new solutions (or other forms of innovation), or various combinations of these. Developers thus seek to leverage early-stage loans or even seed money to get a project ready for funding. 

This was In3’s earlier focus — helping companies get ready for funding, which in the days of new tech commercialization was the only way to “crack the code” of scalable and sustainable solutions to energy, food, water and materials, now often referred to as climate finance. But since roughly 2004, the stakes are even higher in sectors that have already reached scale, where fundamental technology innovation usually must disrupt what has come before, shaking out new market opportunities, leaving behind some of the incumbents.

Investors these days have a hard time grasping let alone trusting or believing that new solutions to vast problems like clean and affordable baseload power or better building materials or truly effective carbon capture that doesn’t risk causing bigger problems. But with adequate preparation and objectivity about the solution’s place in the market (being careful not to “fall in love” with a solution that takes your eyes off what the competition is doing or has already achieved) and you may get traction. Commercial proof-of-concept will be an issue for anything new, but In3CAP’s only concern is a solid business case with defensible offtake arrangements. Technical risk isn’t a show-stopped, just like funds that are available for projects that are far from “shovel ready” — we look at project funding proposals differently than traditional sources would.

“Readiness” is a fickle thing, where some investors do expect thoroughly documented, signed-and-sealed contracts in a dataroom that proves construction can proceed (aka “Notice to Proceed” or NTP in some sectors) without delay and with very few remaining risks. In3CAP is fine to pay for remaining development steps, feasibility studies, or whatever it takes to reach successful completion of the project’s operating assets.

Solution 2: Better and more flexible terms than traditional project financiers – if there’s a debt component at all, it will be based on SONIA + 2.5% APR for the life of the loan (up to 20 years or more), with a minority equity kicker, up to 100% of the project’s finding, combining mezzanine debt* and equity, but with no need to control the project assets. More often, when interest rates are on the high side, CAP funding can be equity only, no loan, no interest to repay. Funding can be arranged in the local currency.

* Mezzanine loans, like subordinated debt, do not require a collateralized lien against operating assets.

Few project financiers can offer 100% financing at all — lenders expect an equity investor to take on a meaningful share of the risks, and for-profit equity investors expect to leverage debt, especially nowadays, while interest rates are low.

Even with 100% financing, we will ignore the equity/debt ratio and, with proper vetting by In3, will then move rapidly through formal due diligence to deliver a binding offer within 30 days (see problem 3, “the “need for speed”) without any application fee, no due diligence costs or up-front fees.

Problem 3: The need for speed. Timing is often critically important, but traditional investors typically don’t know how long they will take to complete due diligence. Why? Because your project might not actually survive their due diligence at all, so how can they (or you) hope to predict the time it will take to reach financial closing let alone actual funding? Due diligence often surfaces unforeseen issues or inadequacies that cause the deal to fall apart. Most institutional investors are painfully slow anyway — banks and multilateral funders, for example, regularly take 4-9 months to deliver first funds.

By the time we begin our streamlined due diligence we’re already clear that the funding scenario is acceptable (that’s what we mean by “pre-qualification”) and have transparency on who is involved, what counterparties will be used, and that the financial fundamentals make sense. Assuming the developer’s written materials line up with prior representations, we’re good to go. Beyond that, we are remarkably un-concerned about the items that traditional project investors find untenable — a long list, actually, such as low IRRs, any hint of technology risk, lack of direct industry experience by the management team, political or currency risk, … dozens more, depending on elemental 5 W’s — who (is involved), what (project industry, size, status/uses of funds), when (market timing), where (country/location as well as the exact site), and for impact investors, why.

Heads up about timing and the need for speed with other investors: Lack of response can lead a prospective client to aggressive behavior, like setting arbitrary deadlines or threatening to take their deal elsewhere, as if that will bear fruit (appearing desperate simply raises a red flag), so coping with this reality requires extreme patience by developers, admittedly the one thing most developers lack. 

Solution 3. Faster funding – Rapid due diligence, with pre-qualification certainty of underwriting acceptance, typically 30 days or less, with financial closing if the developer performs (facilitates delivery of the completion assurance guarantee hardcopy) once terms are reached and all contracts are entered. Then at most 30-45 days until first draw of capital following financial closing. Start to funding within 6 weeks is not uncommon.

Problem 4: Lack of alignment on teamwork or on incentives to complete the project assets on time and within budgetary estimates.  With access to more affordable capital, you can also afford to involve and hold accountable an EPC or construction firm as is routinely accomplished through insurance. Here, a financial instrument provides the security that the project will be delivered, and when the developer/owner does not happen to have sufficient financial depth on their own, a guarantor or “sponsor” can provide this security, often for an enhanced fee to deliver the enabling guarantee. There are other methods of securing a Completion Assurance guarantee, but this one aligns incentives and helps focus the team on the real goal: financing, building and operating the project to reliably deliver benefits per performance expectations over the life of the project.

Why does this alignment and focus on cooperation matter? Sometimes it doesn’t, but disputes do often arise between the developer and construction/EPC firm (or OEMs/vendors) that distract from teamwork and/or threaten continued good will and cooperation. Fights have been known to break out over what is fair and reasonable, or even worse, some firms attempt to maximize their profits or take advantage of developer omissions or underestimations of costs. Contingency allocations dry up over night. The blame game ensues. Some projects can get held up indefinitely as good faith turns sour and lawsuits get threatened. All of that is avoidable.

Our use of well-proven financial instruments (such as the established case history of URDG ICC 758) puts some “teeth” into the contractual arrangements, as it aligns incentives structurally, power tools for working through any such problems, keeping the perceived level of acrimony low enough to make sure issues are handled in an above-board and cooperative manner. In effect, there is no hiding or game-playing with such clear lines of responsibility and accountability. No lip service or placating can take the place of real solutions, and the various stakeholders will not be tempted to go underground.

The guarantor can be either the developer (less common for developers that have not built prior projects in the same sector) or a sponsor/backer that is held accountable for this, as some of the risk of non-completion is carried by the existence of the instrument. Note that we have never called a guarantee in our entire history, nor do we want to; the guarantee’s existence helps focus everyone on the desired results. More on this via FAQ, “What reassurance is there that the guarantee, once sent, will not be misused, called or cashed in?“

Solution 4: Completion assurance – we ask for a party to bring a Financial Guarantee, that is, one of several types of acceptable financial instruments designed to get the project completed and commissioned for commercial operation (called the “Commercial Operation Date” or COD).  This delivers all the funding needed to finish remaining development steps, if any, with draw funds guaranteed to begin construction and whatever is necessary to reach COD. The guarantee itself and the monthly draw schedule are pre-approved and locked down before we even begin our due diligence.

The guarantee invokes an equity partnership, so if conditions change, and warrant increased costs, the completion surety itself filters out malfeasance, and helps shorn up the challenge that other project investors face, namely being “under water” during the construction phase, when all the money is going into the project but there is not yet any revenue. Our use of a financial guarantee bridges that gap over these “troubled water”.

If working with a third party backer or “sponsor” see our whitepaper, Gaining Sponsor/Banker Commitment to Deliver a Qualifying Guarantee

The most widely used strategy for a completion assurance (financial) guarantee is to ask the General Contractor or well-established EPC firm to facilitate one through their bank (as a BG/SbLC) or with their bank’s consent for an alternative, company-issued (not bank-issued) instrument that has been easier for some clients.  Selecting the right type of guarantee.

For a fulsome explanation of how CAP works to solve these problems, read “(Happily) Disrupting Mid-Market Project Finance“. This article is intended for experienced developers who have been frustrated by the dysfunctional dynamics born of distrustful and overly cautious check-writers.

(Happily) Disrupting Mid-Market Project Finance with CAP Funding

Conclusion: Solving these problems expedites and secures capital that is more affordable, reliable and flexible. Apply now.