It is important to note that not all projects will need up-front investment, but for those that do, this section provides a framework for thinking around the development of the investment model. This does not constitute financial advice – as the GFI is not licensed to do so. However these considerations are based on the insight offered by project developers and other market stakeholders.
An investor will be a new core stakeholder in your project, and it’s just as important to think of what you require from investors, as much as what they require from you – so that you can build a positive and collaborative relationship with them.
This entails defining the investment ask (in line with the financial model), the strategy for approaching the right investors, and the negotiation of terms that can then be formalised in contract development (Milestone 8).
This milestone contains three subsets of considerations or ‘themes’ that project developers may want to explore at this stage. Click on each of these themes to the right in order to read more.
You can also read case studies of projects that have successfully completed this milestone of development and view a summary of the common activities undertaken at this stage below.
Before approaching any investors in earnest, it’s good to have a clear idea of what your project needs, what it is capable of offering to investors, what you want to offer investors, and a clear understanding of risks and the extent to which they are being mitigated. However, it’s worth noting that some investors are keen to work closely with you to build the investment ask and support the design of the financial model.
Below are some questions that you can ask to build your investment ask:
The distinction between buyers and investors should be made clear in the Milestone early on.
Where buyers are paying for a defined service or product, such as biodiversity credits or reduced storm water runoff, investors are providing an injection of funds at a certain point in the project to be repaid later with an additional financial return. In some circumstances, they could be the same, for example if a corporate offtaker wants to provide the upfront financing to enable the project, or if a financial investor seeks rights of first refusal on the ecosystem service claims, such as biodiversity or carbon credits.
When a buyer is paying only at the confirmed delivery of the service or product, then investment is often needed to pay for the upfront interventions, fees for developers and other early costs of the project’s operations. This will be debt or equity, and can sometimes be blended with grant funding.
This consideration leads directly from the development of your financial model (See Milestone 5).
Consider first what your forecasted free cash flow looks like across the lifetime of your project, both in terms of shortfalls in cash for operations (financing gap) and what surplus there is across the lifetime of the project (cash free for ‘servicing’ capital – repaying external financing and providing a return).
Free cash flow, sometimes called project-level cash flow, is a key component determining what types of capital you can access for the project, for example repayable grant funding, equity with impact investors or project financing from a traditional bank. Depending on the length of the project, you may also consider different types of capital, or prioritising flexible capital that reflects the different cashflow profiles (and risks) through the project’s lifetime.
As a pre-requisite to building your investment ask, it is advisable to be clear that external investment is the best option and that other options, such as government and philanthropic grant funding, upfront payment from buyers or use of funds from the key project partners are not possible or not as attractive for fully covering the financial gap.
Investors you approach will likely enquire about alternatives the project has considered to investment, and so consider preparing a developed response.
When you have confirmed what your financing gap is and whether external investment is the best option, you can define your investment needs in more detail, which are driven by your cashflow profile, (and also the conversations you will have with your potential investors).
Some basic questions that you ask to define your investment needs a little more are the:
- Size of the investment(s)
- Length of the investment(s), being the entire period of time that the investment(s) will be outstanding
- Grace period, where no interest, dividends or principal repayments are required
- Repayment plan (amortisation), including the start date of repayment, the distribution of repayments and over how many years
At a high level, investments can be classified as either debt or equity based – though some forms of investment can combine features of both, for example quasi equity. Both represent an obligation to pay but often have different legal and financial connotations. For example, in case of defaults or bankruptcy, debt is repaid before equity, while equity can allow voting rights and greater involvement in the oversight of the business.
Some investor groups are capable of offering both debt and equity investments, but most will have a defined investment route that aligns to their risk appetite, preferred level of engagement and need for returns. Consider listing investor group types and their preferred routes, for example:
- Venture capitalists, angel investors and High Net Worth Individuals (HNWIs) often make an equity investment by purchasing preferred or common stock in the project’s legal entity.
- Business banks will offer debt such as term loans, revolving credit facilities and trade financing that is often agreed while using assets as security, to lower the risk of financial loss
- Impact investors, who exclusively target investments with both a financial and environmental or social return, have been known to offer debt and equity investments with more favourable financial terms.
- ‘Crowd-funding’ investments from large groups of individuals, such as Local Climate Bonds and Crowdfunder campaigns, can also be either debt or equity, but project developers should be mindful of fairly representing the risk profile of these projects as these individuals are likely to have both a lower risk appetite and a lower capacity for due diligence compared to more established and sophisticated investors
It is important to note that engaging with investors is a regulated activity by the FCA, so for formal engagement you should speak with a regulated financial adviser that you can look up on the FCA website. This is especially important when approaching investors that are less knowledgeable about risks and returns.
You can calculate the rate of return by iterating the project’s financial model (see Milestone 5), aiming to reach a sufficiently attractive return while also accounting for other uses of surplus, such as cash reserves and community profit sharing. Most investors will want a copy of the financial model as part of their due diligence process to make sure the return is calculated in line with their financial methodology.
Investors can calculate the rate of return in different ways. For example, with equity or quasi-equity the relevant metric may be the Internal Rate of Return (IRR) or Return on Investment (RoI). For traditional debt-based instruments, more commonly used metrics would be interest cover and debt service cover. Consider researching these separate metrics and come prepared to investor meetings with more than one measure of return.
To further develop your investment ask, it is vital to consider this rate of return in relation to the risk profile of the project, as investors generally seek higher returns when projects are riskier. When justifying your rate of return, you can build a picture of the project’s risk profile to the investor using:
- The stability of the rate of return – comparing the difference in the return metrics when assumptions are tested during the sensitivity analysis / scenario modelling in the financial model
- The risk management strategy – demonstrating what track record or precedent supports these assumptions, the likelihood of any of these assumptions failing, and what controls and mitigation measures you are using, which should be outlined in the business case
- The wider social and environmental outcomes – certain investors, particularly impact investors, will factor these outcomes into their view of the rate of the return offered.
Comparing your project to similar projects and their rates of return would be useful for getting a sense of the perceptions around what rates of return are acceptable, though this may be more difficult as this information is often kept private.
Other features of the investment ask to make this more attractive, dependent on the investment type chosen, to investors include:
- Seniority – If your project is using multiple sources of financing, you should be clear on who will be repaid in what order with the assets of the project if it becomes insolvent or dissolved. All else held equal, an investor will want to be ranked as highly as possible to prevent financial loss.
- Collateral offered – You can also pledge certain assets to an investor, such as shareholdings in other entities or leaseholds, to minimise their losses in case of default, for example land holdings or building leases. Note: if offering assets in your legal entity, its advisable to check that these have not already been committed as security elsewhere, for example with general pledges made by a parent company.
- Tax relief – Investors can access different tax reliefs depending on the investment structure, the project and its legal entity type. For example, individual equity investors can use tax relief from the Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR) scheme.
- Conditions – Conditions and other obligations can be written into the legal contracts of both debt and equity investments for standards and activities that the project is required to uphold. For example, offering regular reporting on the project’s environmental and social impacts.
- Financial guarantees – Third parties can guarantee a debt will be repaid to an investor if the project defaults. A financial guarantee can be customised to cover a range of liabilities, from those of the entire legal entity to only a subsection of the investment.
Many investors that are considering your project will likely value the environmental and social outcomes that it aims to deliver, and weigh these in its decision to invest or not. As with buyers (see Milestone 4), some investors will want to know how their financing is contributing to additional and permanent environmental outcomes. Consider building this narrative into the investment ask.
If you want the investment to be paid directly to the legal entity that is hosting the project’s operations, your choice of legal entity (See Milestone 6) may alter what type of investment is appropriate, or even possible. For example, as a company limited by guarantee does not hold share capital, it isn’t possible to sell any stake of the company to equity investors.
In some cases, it may be difficult or not possible to generate risk-adjusted, market-rate returns and secure financing from a single traditional lender.
In these instances, using different sources of financing can help, with ‘impact first’ concessional investors agreeing to different terms, such as with longer tenors, lower rates of return required or by subordinating their investment in terms of seniority. This can help to draw or ‘crowd-in’ commercial investors who do not make such concessions. Non-repayable grant funding or charitable donations can also be used to the same effect.
This general approach is called ‘blended finance’ and is often used in nature-based projects, but due to complexity is typically only used on larger projects that can absorb the associated design, administration and management costs.
The need for blended finance may be case through the lifetime of the project, or within certain timeframes, such as the implementation stage.
As with payments to/from buyers and sellers, it may be worth considering how the investment ask is affected by inflation. For example, if investment is drawn over several years to pay for staged capital works, is there a risk that inflation will increase these costs beyond the investment sum? How is this risk minimised through agreements with delivery partners or mitigated through the investment ask?
In addition to up-front financial investment, consider how an investor can contribute to the success of your project or future projects in other ways. For example by offering financial and commercial advice, raising the profile of your project with external stakeholders, or introducing you to other trusted service providers that you need, such as consultants or auditors.
Once you have your ask outlined, you can research specific investors in more depth and draw key documents together to make initial engagement more effective.
Part of your fundraising strategy is to find those investors most aligned and those that you can co-design the investment with – before then perfecting the pitch and fundraising in earnest.
It’s also very important to hold your own – particularly on impact principles – in these conversations too. That’s often helped if the first/early conversations are with mission-aligned investors.
Finding specific names for this list can be challenging if you do not have prior experience in these markets. Consider speaking to your project partners and/or development funders for recommendations on potential investors. You can also connect to networks of investors that have a focus on nature-based or sustainability projects, such as the Green Angel Syndicate, the Social Impact Investors Group and the Environmental Funders Network.
Alternatively, you can engage with a commercial or project consultant, such as Nature Finance, Palladium or Finance Earth, that has experience in drawing together groups of financiers for nature-based projects.
Consider researching each investor’s criteria for acceptable investments and what projects or enterprises they have previously worked with. For instance, minimum investment sizes and types of projects they look for.
If the investor has no publicly facing investment criteria, then the surest way of finding this out is to speak to them directly. Investors are generally collaborative and open to an informal discussion about the investment case before you kick things off more fully
Securing investment is often a competitive sales process. Investors have limited funds to deploy and sometimes it’s not enough to meet their investment criteria, as they may have many other projects that are eligible.
Consider the unique selling points (USPs) of the project, which should also be included in the business case, and how this relates to the investors you are approaching. For example, where a project is looking to combine or ‘stack’ the delivery of biodiversity and nutrient credits on a single site, an investor may be interested in the potential to extend this model to other habitat bank investments it has made. Alternatively, you may approach investors that are local to the project, and stress the social and economic benefits that the project is targeting, such as job creation and social prescribing.
In any case, you should be prepared with a narrative as to why this project is unique to other potential investment options, but would also be a well-suited addition to the investor’s portfolio.
Below is a list of commonly used document types in initial investor engagement:
- Investment Teaser: A one or two page document that is a brief summary of the proposed investment. It usually includes an overview of the project, the investment ask and the unique selling points, among other high level details. Often it is distributed as the first tentative step in formal investor engagement, and its purpose is to determine potential demand.
The investment teaser usually excludes confidential or sensitive information, sometimes the names of key project partners, and is often sent along with an NDA (see below) to allow further information to be sent to interested investors.
- Confidential Information Memorandum (CIM)– A more extensive document that contains information about the investment opportunity, the project’s operations, forecasted financial performance, management team and overview of the wider market or landscape.
The level of information in a CIM is comparable to that of the business plan. However, where the business plan can be used strictly as an internal resource, the CIM is geared specifically towards the investor and can be more or less tailored in certain areas.
For example, it can contain a section on why the project is a great fit for the investor and its existing profile, the proposed due diligence process, and potential synergies the partnership could achieve for the project and beyond.
- Term Sheet – A term sheet shows the main terms by which the investor will make the financial investment in the project. It is usually presented as a table and contains elements such as the investment amount, interest or dividend repayments, security offered, use of investment and conditions precedent and subsequent.
The key parties usually sign the term sheet, but this is a non-binding agreement that the parties can withdraw from without legal penalty, and can
Financiers, such as banks, often have their own term sheet templates with terms that they want to be clear on, See the Useful Links within this Milestone for an example of a term sheet template.
- Expression of Interest (EoI) – An EoI is a non-binding form or a letter that is completed by the interested parties, in this case investors, which more formally expresses their interest in the project. This can technically be given at any point but is usually given after receiving the CIM or at the end of the due diligence process. It is also sometimes called a Letter of Intent (LoI)
As with buyers and sellers, it can be extremely useful to have this interest expressed in a more formal document, to take to other stakeholders such as grant funders, other investors, or delivery partners.
At this stage, you will likely have several more detailed documents prepared, such as the business plan and financial model. Investors will likely need access to these documents as part of their due diligence process (see below), but it is more common to first confirm investor interest with the above list of documents, before giving investors access to a data room with this fuller set of information (see below).
A Non-Disclosure Agreement (NDA) can be used if the key project stakeholders have sensitive data that needs to be protected against misuse. If an NDA is needed in investor engagement, it is usually issued alongside the Investment Teaser or during initial contact.
In the event your project needs an NDA and you don’t already have a preferred template, the most convenient option is to ask a key project partner with access to legal counsel to draft one. Alternatively, there are standard template documents on the internet you can use free of charge,.
Your preferred engagement strategy is dependent on the investment offer, what type of investor you are approaching and the number of potential investors, among other factors. Consider how your preferred investment approach also aligns to the wider tone and objectives of the project.
For example, after issuing the initial documents, you may host a group meeting with investors to reflect an open and collaborative approach to due diligence, and the chance for multiple investors to participate. Alternatively, if you think your project is attractive enough to achieve a lower return rate (keeping financing costs low), you may choose to foster a more competitive ‘bidding’ process with a set timeframe for due diligence. A financial advisor can help structure an investor engagement strategy.
At this point, you will have one or more potential investors that want to undertake a full due diligence process to become comfortable with the project’s plans. You should also be prepared to negotiate on the investment ask, being clear on what your project requires versus where you can adjust the investment model, or other features of the project, to meet their needs.
Due diligence is a broadly used term that refers to the investigation performed by an investor to confirm the robustness of your project or enterprise.
Investors will want to explore the financial model of the project, but also the targeted environmental outcomes, risk management strategy, proposed organisational structure and other core aspects of the project.
There’s no one answer for how long this process can take – and the various times generally follow a bell-curve of distribution. Anecdotally, due diligence can between one and six months, but the timing is very investor dependent. Most due diligence processes fall within the two to four month timeframe.
It’s generally in the interest of all parties to conclude due diligence as quickly and efficiently as possible, without compromising investors’ understanding of the project, as this process takes time and resources for all involved, and a drawn-out due diligence process can also delay project timeframes.
You may therefore choose to keep the due diligence phase open ended until all required investors are comfortable, or set a deadline for investors to conclude their research and present an offer.
Project developers give access to several confidential documents in this process, such as the business plan, financial model, scientific studies or valuations of the site(s), and any MoUs or draft contracts with other key stakeholders. To manage this exchange of documents, consider setting up a data room (see below).
A virtual data room is a digital space used for housing information, usually of a confidential or sensitive nature, to which several parties need access.
Data rooms are often used to share information with investors in a secure and efficient way, such as business plans, financial models, draft contracts, ecological surveys, property valuations and market research. Depending on your approach, you can also use the data room to share due diligence findings between investors, such as FAQ documents that synthesise the questions that investors have posed and the answers given.
You may choose to set up a data room to make the investor due diligence process more efficient, for example if you’re engaging with several potential investors or if there are shared documents that are subject to ongoing change. Alternatively, you can simply send these documents to investors over email, post or fax.
To set up a data room, you can engage with professional providers, such as Intralinks and Datasite. These offer more advanced features such as varying levels of access and data insight offered to the project developer on who has downloaded what documents and what information has been most viewed. However, these come at a cost, sometimes up to £10k, and can be unnecessary for smaller projects. You may decide to use cheaper or free alternatives, such as SharePoint or Dropbox.
As well as questions during the due diligence process, investors will likely come back with requests and requirements that differ from your original investment ask. Below are some example scenarios of what investors may want:
- Requesting a higher rate of return than originally offered by the project, or asking to be repaid sooner than modelled
- Offering an equity investment, whereas the original ask from the project was long-term debt
- For the project developer / manager to commit their own capital, as a means of demonstrating their own commitment and aligning incentives
- To be formally represented in the governance structure, such as through a registered Director position within the legal entity hosting the project (see Milestone 6)
- Additional security, in the form of collateral, guarantees, or insurance
- Certain reporting requirements, such as tracking the project against the investor’s own Key Performance Indicators of their investment portfolio.
Consider the likelihood of such scenarios and what points of project design you are prepared to change, versus where original plans must be kept the same.
For example, if returns are insufficient, the financial model should be revisited to understand the options for maximising positive cashflows, such as raising selling prices, accessing further grants, reducing certain costs, and bringing revenue schedules forward.
Securing investment is rarely just a transaction – it’s also building a relationship with a new core stakeholder in your project. As you progress in your engagement with potential investors you can think of how this relationship is developing to be collaborative, positive, and mutually beneficial.
Investors will generally be keen to build this relationship with you. Below are the common points that project developers and investors alike list when they think about positive relationships:
- Alignment of values, strategy and environmental / social impact
- The right investment on the right terms
- Regular communications – including sharing on the good news stories and successes of the project
- Profile raising and public representation of both the project and the investor’s contributions.
- Ad hoc advice – such as commercial and financial planning
- Access to connections and wider networks – such as other project developers, supportive government initiatives, and service providers.
The key difference between the two terms is their enforceability. A binding agreement can be enforced through the law, and failure to comply with it can lead to serious penalties (depending on the severity of the breach). However, a non-binding agreement cannot be enforced through the courts and is more commonly known as ‘an agreement to agree’.
Similar to Memorandums of Understanding (MoUs), non-binding offers are useful for making sure all parties are on the same page, and can be used to demonstrate the project’s viability to others. For example, an investor may not want to sign a binding loan agreement until a buyer contract has been signed that will ensure the investment is repaid, however the buyer itself may want to confirm the investor’s appetite for its own assurance.
Investors will often agree to a non-binding offer first, for example with a signed term sheet or Letter of Intent (see above). Such non-binding documents are often carefully worded to prevent any legal interpretation of a binding offer. See here for a useful article on non-binding offers and their wording.
It is also advisable to confirm in writing what is required to convert this into a binding agreement, for example the signing of certain contracts, the set-up of the project’s legal entity, or certification from a nature-based standard. Again, this would not make the offer legally enforceable, but is useful for common understanding and efficiently moving the project to full legal contract development (see Milestone 8).
You can download a Word copy of the Milestone 7 Considerations as a checklist here, to help with your own project planning.
Alternatively, you can find a simple list of the Considerations below:
Defining the investment ask
- What is my financing gap, and what cash flow can be used service capital for this gap?
- Is investment necessary?
- What are my investment needs?
- What investment types are available? What investor groups are most appropriate?
- What can I offer as a rate of return? Does this align with the risk profile of the project?
- What other assurances or incentives can I offer investors?
- How will this investment support the delivery of environmental outcomes that will remain after the investment term has ended?
- What legal entity will be used to accept the investment, does this serve as an efficient ‘point of entry’?
- Am I seeking a ‘blended’ investment structure with commercial investors, concessional investors and/or grant funding?
- Am I looking for other services from my investor(s)?
- How can I draw together a list of suitable investors?
- What are their investment criteria? How does my project align?
- Why should the investor pick this project over others?
- What documents should I use in initial engagement? What do these entail?
- When may I need a Non-Disclosure Agreement?
- How do I manage engagement with several investors?
Ongoing engagement and securing offers
- What does an investor’s due diligence process require? How long might it take?
- Should I set up a virtual data room?
- Where can I be flexible in negotiations?
- What is the difference between a binding and non-binding offer?