Working with In3 Capital to secure CAP Funding guarantors as a DFY service
Program 4: How to obtain a third-party guarantee via In3 Management Services
Checklist of requirements for “Done For You” (DFY) premium guarantee services (1 page PDF)
In3 can coach developers/owners/agents to facilitate their own project’s guarantee without cost, to a point, but for In3 to take responsibility for securing a guarantee used for bespoke CAP funding (more about what makes CAP funding different) a premium fee-for-service commitment would be requested from the developer’s side.
This works best when the project or portfolio of projects fits In3’s “sweet spot” focus areas (more), which is mainly renewables, regenerative agriculture and food systems, regenerative hospitality, climate change mitigation, affordable, green and/or social benefit housing, and resource recover / waste-to-value.
In addition, with In3’s representation, we must work together to adhere to strict underwriting standards that are imposed on project teams to gain acceptance by guarantors we would introduce. In practice, this includes close to zero commercial risk and a rock-solid developer track record, including an ability to present and discuss their project(s) with proof points in evidence, instead of unsubstantiated claims.
How does this work in practice? We would enter a premium services contract and work together to deliver an investible package that meets or exceeds these standards, then In3 arranges a suitable financial guarantee from best-available sources, either via an established provider, dedicated Impact Guarantee Fund™, or bespoke to the client’s project for an additional fee.
In most cases, developer credibility is critically important, as expressed in the above checklist.
This Management Services Agreement (MSA) structure is a type of “joint venturing” — a partnership, of sorts — that “curates” and features your thoroughly vetting project as an opportunity for a third party to leverage their available assets for a short-term Completion Assurance guarantee (guarantor landing page).
Typically, these are asset owners and managers that wish to preserve available cash, but who can gain upside (liquidity) by pledging available assets to back one or more projects, relying on well-proven, international Demand Guarantee rules. We enable the parties to securitize the project (in the extremely unlikely event of developer default, offering “step-in” rights) and everyone gains confidence it will be completed.
In3 can only deliver such services under a “pay to play” contract where the vast majority (but not all) of our compensation results from completion. This is the partnership aspect of a “shared risk, shared reward” model, similar to a concierge “done for you” (DFY) service. If that is out of reach, we remain available to advise, coach or consult on an hourly basis to help you get the results you seek.
Why is our DFY Premium Service fee structure necessary? Short version: our reputation is on the line when we present your project(s) to our cadre of asset owners. So, we have to properly review (audit and verify key facts) your written materials to prepare for gaining support by guarantors. This offer to sponsoring guarantors requires that we demonstrate quite clearly that your project upholds the highest quality standards and that you and your team have the utmost of integrity, skill and determination. Your proposal must be transparent about remaining risks and consistent with how you talk about it.
Further, as a matter of fairness, we would not put your project’s guarantee sponsorship ahead of others that are now at the table, all of whom paid to be there. That would be both unfair and impractical. Featured projects are vying for attention from asset managers and owners in our cadre who look for projects that fit their “sweet spot” so they can back them with the same confidence our family office gains before committing to funding. Similarly, we must be committed before it will be possible to go the distance with guarantors, where both “arm’s length” objectivity (like a lawyer’s representation) and respective “skin in the game” drive the negotiations to reach closing.
Some asset managers may prefer a combination of cash loan/investment plus a completion assurance guarantee for the rest. This is a key negotiation point, and each project and potential guarantor are unique. More on the benefits of this hybrid approach (described for the guarantor/lender audience) here.
In these cases, when asset owners/managers co-invest with In3’s family office, this achieves two things:
- Co-investment reduces the net capital investment from In3’s family office partners, as well as reduces the size of the required guarantee, proportionately
- Co-investment also divides the equity carried interest proportionately between the equity partners.
This is sometimes additional equity, the price paid for rapid, 100% financing, as it is more labor intensive to find an “arm’s length” financial guarantor, where projects that can bring their own guarantee get to reach more closings, more often, typically by offer less equity to the capital provider(s).
When sponsorship is strategic, such as when the guarantee comes from an EPC firm or major supplier of equipment to the project, which entails the work of finding and short-listing sponsoring EPCs or OEMs and taking the best offer. Attracting arm’s length guarantors (those not directly uninvolved in building or supplying the equipment) is much more similar to conducting a capital campaign, which can be quite labor intensive.
Project developers seeking to attract backers will find affinity with working in similar focus industries, project size and pipeline scale, positive impacts, geographic location and when the developer’s management is seen as having excellent presentation skills. No amount of preparation will hold up if the development team does not come off as polished and deeply experienced at what they do. Please don’t take this personally, but In3 will not be able to enter an MSA with developers that cannot communicate well enough to pass the guarantor’s due diligence.
Before entering an MSA with us, expect more than a few meetings to make sure we are on the same page. This is the 3rd and arguably most important pre-condition — beyond a solid IRR projection and low enough commercial risk — for working together under a JV structure.
How CAP funding is different — the New Risk Paradigm
Traditional project finance (in sharp contrast with CAP funding) also carefully considers the risk profile of a given project before financing can be secured. With CAP funding, however, the risk/reward equation is turned on its ear, where the family office partner will take on many of the risks that would otherwise kill the deal (or at least are strictly prohibited by the underwriters and can slow or stop progress), such as any remaining credit risk (debt service coverage and leverage ratios), technology risk, business model risk, or even performance or execution/operation risk once the project begins generating revenue. None of these are an issue for CAP funding. The tradeoff is that we just won’t accept the majority of completion risk.
But if you’re concerned about the guarantee requirement, first review this article about how completion assurance guarantees are key to gaining advantage, including fundamental access to funding that might not otherwise be within reach. The unspoken truth about traditional project finance is that it seems like it should be much easier than it is. The reason for this ties to a human fallacy — we sometimes “fall in love” with our projects and ignore (or simply filter out) the weaknesses that others will spot immediately. In3’s objectivity helps make sure that doesn’t get in the way.
What’s in it for guarantors? Returns on assets loaned and usually a modest equity carried interest. Backers of fully vetted projects in their wheelhouse usually gain above-market-rates of interest on assets pledged and/or bridge loans for bank fee coverage (temporarily turning fixed assets into completion assurance instrument via a bank’s guarantee or endorsement), as well as an equity stake proportionate to their capital contribution. Once the project begins Commercial Operations, the guarantor is repaid plus interest (the family office covers these financing costs on an approved monthly draw schedule), and can include repayment of any higher-APR bridge or construction loans via the family office’s long-term debt, which can be as low as 3% (SONIA + 2.5% fixed) APR.
The developer may optionally wish to use cashflows to buy out equity interests. We typically reach closing within 30 days of a usable guarantee scenario, with first draw of funds 30-45 days after that.
Questions? Contact us or call +1.831-761-0700 Ext. 1
