For lenders who wish to enhance their returns using CAP funding

What it is

Combining the best of both asset classes — senior debt and equity carried interest — yields better returns at lower risks than debt alone.  Owners can leverage some of this senior debt to qualify for In3CAP funding.  In3 Capital can serve as a “one stop shop” with a continuum of private funding for impact projects of $50 million or more.   

This structure involves a proportion as senior debt with the rest from our private family office (called CAP funding), which if split 50/50, for example, the capital stack would have looked like the figure shown on the right.  This example uses $100 million total budget, a combination of $50M each senior debt and project equity, which could be in any sector and country where we work.

With $50M as senior debt, the project would generate the reliable returns of debt service for the lender, whether interest-only or principal plus interest.  The remaining $50M via CAP’s family office would usually be as equity carried interest, in this scenario, potentially offering just ~12-25% of the cashflows for the family office.  This may leave room for an equity kicker to the asset owner that brings the Completion Assurance Guarantee (CAG), or with senior loan funds in hand, the project owner may be able to use those funds for their own CAG.

A new option also allows owners to use a cash deposit to bypass the need for a guarantee entirely.  The deposit is returned in lump sum upon the final draw of equity funding, enabling more rapid debt service of the senior loan.

Larger projects can combine multiple sources of funding and/or guarantees, sharing risks and rewards proportionately.

CAP funding just got better!

Due to higher interest rates in 2024, CAP no longer needs to use any mezzanine debt, thus there would be no interest expense to repay from our side.  Minority equity without the need for control at any stage of readiness, delivered reliably and quickly … is still what we offer with either some of the senior debt used as a cash deposit for the rest (as CAP funding), or backed by a partial Standby Letter of Credit (SbLC) to accomplish the same benefits of completion assurance.

Some projects can involve a third-party guarantor as a “sponsor”.  The guarantor’s position can be securitized via step-in rights for the guarantor in the unlikely event that the developer does not perform.

How it works

1. Complete your normal due diligence process on the project or portfolio (hereinafter, “Project”).
2. Once you are comfortable that the project meets the lender’s criteria, consider the following:
   1. Direct loan or syndication of 30% to 70% of the total funding through your normal channels. Put the capital into escrow or with your bank and use it as collateral to obtain a short-term Standby Letter of Credit (SbLC) or cash deposit, minimum ~30% of total funding.
   2. With surplus loan funds in escrow or on deposit, use it to earn interest against a basket of U.S. Treasuries.
   3. Provide the SbLC or cash deposit for an equity investment (to be negotiated) in the Project, noting the anticipated returns expressed as unlevered IRR.
3. With this structure you have now reduced your lender’s risk, and gained more flexible repayment terms, decreasing interest expense and easing debt service burden (relieving the pressure of time), and increased your potential returns in comparison to a standard project loan. Why?
   1. You are putting less capital at risk.
   2. You avoid paying any interest on the equity investment — CAP funding earns a portion of net cash flows, once the project is operational and cash flow positive.  There is thus time to do things properly over the longer haul without the pressure to make compromises.
   3. There will be enhanced contractual rights with the lender and CAP’s family office to cure any potential defaults, and the lender has the incentive to cure, because they are the party taking the execution/tech/political/hedging risk whereas the developer (if self-guaranteed via the senior loan) or the third-party guarantors only bear partial risk of construction completion.
   4. Even in the unlikely case of developer default, not only will the guarantor/lender have earned fees in the meantime, but the guarantor/lender may be entitled to a percentage of any sale of the distressed assets due to their step-in rights or senior lien collateral. Even if the assets were to sell at 50% on the dollar, the guarantor/lender would likely still earn approximately what they would have expected to earn under their standard loan program.
   5. Therefore, when all goes as planned, the developer earns their portion of IRR, while in the worst-case scenario, guarantor/lenders will earn equal to or a little less than expected while at the same time greatly reducing the overall risk profile.
4. In addition, if using a separate (third party) guarantor, we might be able to arrange an insurance wrap for that guarantor or syndicate (via Impact Guarantee Fund) to hedge their risk even further for a little less guarantor upside.

Ask us for CAP funded project examples and additional deal structures