How In3 Affiliates can help developers obtain project capital guarantees

Confidential Memo for In3 Registered Affiliates, Staff and Joint Venture Partners

Best Practices Guide updated July 2021, Version 2.5

How In3 Affiliates can help developers obtain project capital guarantees

Purpose: This guide provides detailed instruction for presenting the opportunity to secure In3 CGP project funding. How? First we classify objections to bringing the guarantee then we address them to determine whether or not a prospective client is able to qualify.

This, in turn, helps mitigate risks for all parties, to make sure you and they are not wasting time. This guide will help you
1) Determine the root cause of objections, by type, in an effort to turn the situation around
2) Reach conclusions more quickly about what attention they do or don’t deserve, and
3) Succeed more often with reaching financial closings, so that everyone gets paid.

There are three acceptable types of guarantees for In3’s Capital Guarantee Program — Bank Guarantee / Standby Letter of Credit (BG/SBLC), Avalized Promissory Note (APN — new!), or Sovereign Guarantee (SG). Comparison for project developers (AKA intro “roadmap” article) or Comparing these in more detail (their relative requirements and tradeoffs).

Public (customer-facing) Guides to In3 “guaranteed” funding:

Success Tip and Procedures for obtaining a capital/finance guarantee

Why use a capital guarantee at all?

“How to” step-by-step procedures for project developers to facilitate a sponsor’s qualifying guarantee

Outline of Guide Sections

Introduction (see above)

How we assess project finance feasibility (next section)

Part 1 — getting their buy-in

Part 2 — Working with Sponsors willing to bring a qualifying guarantee

Part 3 — Affiliate Practice Management

Success Tips and Resources Guide

How we assess feasibility

In addition to RAIN scores, In3’s CRM platform (Zoho) uses a 1-5 scale for Feasibility as a key part of its incoming lead scoring algorithm. This feasibility indicator is a key part of our incoming lead scoring algorithm.

Short version of this shared vocabulary, presented here for your quick reference:

Ditch the 1’s
Repair the 2’s
Investigate the 3’s (to adjust up or down, in or out, based on clarified facts)
Verify 4’s and consider involving other Affiliates if project is in a industry or country (or other factors) not within your expertise, or
Expedite the 5’s (fund these first).

To help us remember these shortcuts, we use mnemonic: DRIVE

See Feasibility Scores — how we work toward client success for an expanded explanation of how this works, which is covered in the Affiliate MasterClass.

Note that access to Zoho can be provided to registered Affiliates via a $15/month subscription fee (paid to Zoho per each user seat), though such a subscription is not required at this time.

Part 1 — getting their buy-in

With the right approach, In3 Capital’s partners and affiliates can usually gain de facto exclusivity from developers seeking to raise funds for qualified projects. Why would they agree to this? Because, history shows we offer the best terms and have by far the least stringent conditions for reaching financial closing and rapidly funding such investments. More at Cornerstones of In3’s Capital Guarantee Program

Further, most of the time, but probably not always, CGP funding is available at competitive rates along with several advantages with varying appeal, summarized here in likely order of importance (your developer may care about advantages listed toward the bottom, so ask, don’t assume anything):

Rapid and reliable financial closings and funding draws, made possible via the model (using a capital guarantee), allowing for more streamlined due diligence, surfacing few show-stopping challenges along the way. Also, with our pre-qualification protocol, we test the viability of the transaction ahead of the official “ask” so there’s that extra layer of quality control to deliver the desired results.
Streamlined, “one-stop-shop,” a hybrid of debt and equity, up to 100% of the project’s budget.
Flexibility about the stage of development, state of readiness, and timing to begin and/or complete construction. We don’t mind paying for the remaining steps to get the project going. Just be sure to disclose those costs and the proper status within the set of Six Essentials for pre-qualification, namely, the Use of Funds and draw schedules.
No lien against operating assets — we’re not using senior debt or expecting first position on a “mortgage” — which leaves the project’s assets unencumbered on the developer’s balance sheet. This means that subsequent project guarantees will likely be within reach without a sponsor.
Can receive and repay funds in the local currency (guarantee must be in US$ or Euros, but the currency for the actual funding is up to the client).
What did we miss? [ Email Daniel to add your top selling point(s) to this list ]

In practice, the “Surety” cornerstone (obtaining and using either a Bank Guarantee or a new option, an Avalized Promissory Note, together the “BG/APN approach”) has seen project developers fit into one of three categories:

A) Yes — a capital guarantee during construction is fine

B) No — it isn’t possible, or desirable, for whatever reason, and

C) Maybe — we do not know if a guarantee can be obtained or will work for us.

We use these categorical ABC’s as an internal shorthand. Of course we want to focus mostly on the category A’s, the low-hanging fruit, but our MasterClasses help you move initial category B “No” or category C “Maybe” responses to a solid category A commitments that, in turn, rapidly and reliably lead to financial closings.

How to get started

Pitch the program’s purpose, goals, benefits and advantages and listen for a “yes” but be open to a “no” (dig further to understand the objection), or a “maybe” (clarify the confusion) and what it would take to make a wise and informed decision, a clear yes or no, one way or the other.

The first 6 months of CGP, back in 2018, proved that it is extremely easy to present the CGP opportunity in ways that generate a catalog of misunderstandings, mostly because this program is a bit different (we prefer to say “innovative”), so trying to fit it into what’s already familiar and customary simply will not work. This holds true with bankers, in particular; see article for a set of observations and three “myths” (mistaken assumptions that are widespread with experienced bankers) that, once busted, will open minds and wallets. Do not share this article with bankers.

Instead, liken CGP to what’s familiar, but then immediately draw out the distinctions of what’s different, to head off wrong assumptions before they become engrained. “Immediately” means in the same breath if not the same sentence. Once false impressions take hold in the other person’s mind, if they are allowed to stay there unabated for awhile, it becomes increasingly difficult to dislodge them. What would have been momentary “confusion” about how this funding works, a lost opportunity to quickly clarify why this guarantee-based approach is needed at all, would later requires that you (or someone) reset expectations, and then later still snowballs into a “big misunderstanding” that is often met with incredulity, where the client/sponsor/banker could feel misled, thus out to blame or find fault in others, sometimes actually upset enough to ask out load “Why the **** didn’t you tell me that before?!”

In other words, start with pointing out what is dissimilar, innovative and new about this funding program. Some of the key contrasting comparisons are shown here. This chart will mean different things to different people, depending on their skills, personality and experience.

In order to save you time, we recommend that you first present to anyone willing to read/listen (pepper them with the advantages/benefits to “inspire” them to understand this “innovation” in order to see how we “invest” — the 3-in‘s): “Deciding if Capital Guarantees offer advantageous funding, and which one to use“. By definition, such leads are at least a Feasibility score of 2 on our 1-5 scale (see above or details) if they demonstrate curiosity, a penchant for seeking out new experiences, insights or knowledge, … or if they’re coachable and the project otherwise seems solid, then a score of 3 or higher would be assigned.

Selling Scenario Conclusions: Only you can judge which Category a developer initially belongs in. Sometimes an initial “no” should be accepted without digging further. That is sometimes the case when such interactions begin with tremendous resistance (bordering on hostility), when such opposition is not based on pure misunderstanding. We sometimes label such recalcitrant and opinionated personalities “too smart to learn.” That dynamic may remain a constant in the relationship throughout, so best not to try to “convince the mule.” Could be a complete waste of energy. But more often (and with great skill, which actually requires less time/energy), such resistance can also be matched (acknowledged, sided with, or “paced”), understood, and then turned around.

CASE STUDY 1: How not to “resist resistance” (definitions/article)
Here’s how we recommend you handle those who say they could bring a guarantee (have capacity and/or resources or a network with same), but simple won’t due to one or more objections. When a prospect indicates an ability to bring a guarantee, but a reluctance to do so, gently challenge their assumptions and look for what information is missing. Side with them, looking at the situation from their point of view, rather than arguing.

Plan A: Facilitate making a wise decision. How? Fight for their right to make whatever decision they feel is right ONCE THEY HAVE LET IN TRUTH. The information they are missing is indicative of their belief in unicorns, falsehoods, untrue or only partially true information, aka disinformation. With rapport, siding with them, demonstrating that you are genuinely trying to help, go on a brief hunting expedition to discover what is the root of that stinkin’ thinkin’. Sometimes it is just a lack of rationality, more just emotionality (quick judgement), the slightly lazy/conservative fear of making a mistake or being seen as foolish. Feelings (intuition, interpretation, opinion) often keep In3 CGP facts at bay at first.

Plan B: Get to root cause another way: If you can’t surface the root cause of their refusal to bring a guarantee, simply ask why. Keep asking “why” (they don’t want to bring in the required guarantee) until you and they both become clear that there are reasons, even if you don’t agree they are valid reasons.

Plan C: Pitch and Close to Bypass stated objections. Remind them of the benefits/upside advantages for the contemplated project, state that In3 CGP is not for everyone, but perhaps under the circumstances, a better-than-average offer could be available. Point out that we do not ask anyone for a binding commitment or up front fee, so they literally have nothing to lose if they “play along” and find out what sort of equity carried interest and debt offer will be made.

CASE STUDY 2: Allow someone’s passionate reactivity to play out

We’ve seen a pattern with many who were initially hostile and insisted that something was unfair, illogical, backwards, or “stupid” about our program (one Swiss banker wrote that we must be fraudulent, therefore), where we did not argue with them, but instead simply said “Well, this funding isn’t for everyone … good luck finding what you are looking for.” We knew full well that what they were “looking for” — the holy grail of perfect funding for a highly imperfect project — simply did not exist. That confidence from our side gave them pause. It caught them a bit off guard. They expected us to insist and admit we did not have a tenable offer worth defending or at least that they were right and we were wrong. Giving that polarized thinking little attention provided the fundraising equivalent of catnip to an egotistical, arrogant and off base banker. They came back a month later with heightened interest in making our funding work, which was the leverage we needed to break through their narcissistic brain fog.

Trust your intuition. If you have already built up a strong book of work, and don’t need to ‘wrangle’ their misunderstandings, wish them luck on their own (metaphorically “show them the door”), or suggest they read our FAQs in3capital.net/frequently-asked-questions, or otherwise come back to the table when they have taken our funding offer more seriously.

There’s no point working harder than they do at showing them what’s ultimately in their best interest anyway.

It helps when the client/sponsor/banker is open to new ideas. In selecting a metaphorical jury to help sway opinion, pick those who are a bit analytical, “bookish”, and like innovation/novelty. If they actually still read (Twitter hasn’t addled their brain too much), FAQs are often enough to provide comfort and confidence that this solution is real, the money is achievable, and though not for every situation, often delivers advantages that far outweigh the cost (investment of time/effort/energy). That would mean a Feasibility score of at least 3, based on their demonstrated ability to learn how to succeed.

The most basic introductions … which one(s) do you prefer?

Or, at the beginning of such interactions, offer the prospect either our new “Looking for Project Funding” introduction page (in3finance.com/funding), or our New Client Resource Center (in3finance.com/newclients), which explains that they can either get it together (using our Proposal Builder) or pay a deposit for the value we deliver due to the increased uncertainty of working with more tradition project financiers.

Some clients think they have better options, and months or sometimes years later they come back, having realized our original “straight talk” was based on the real world. No need to pressure them … no need to push on their resistance.

We will walk through 4 basic selling scenarios below, including when to introduce the alternative to a BG/SBLC, the Avalized Promissory Note (APN).

SIDEBAR: Sovereign Guarantees are another story and seem to be drying up as a result of COVID and other factors. Few countries still can issue them, as they often get caught up in politics, or the IMF’s restrictions, making the better options (a) ask the government to direct a commercial bank to deliver a BG/SBLC on their behalf for the project(s), or (b) ask the government to direct a commercial bank to stamp the project company’s Promissory Note.

For Affiliates & Staff Only:

Registered Affiliates can use this confidential Proposal Builder (AKA “In3 Affiliate Dataroom”) that provides additional templates and resource material not made not made available to developers except under NCNDA following basic KYC. If you don’t already have access, ask for the password to unlock Affiliate MasterClass Proposal Builder (toolkit) where you will also find the latest course presentation materials.

Four Basic Selling Scenarios

What does the prospective project developer say or write in response to the offer of funding if they can facilitate a suitable capital guarantee?

A) Yes [the prospect, usually the developer, responds that they can or will bring a qualifying guarantee ] – to them, it seems relatively easy to obtain and use a Bank Guarantee/Standby Letter of Credit (BG/SbLC) or Sovereign Guarantee, or (if necessary or advantageous) an Avalized Promissory Note.

Sovereign Guarantees (SGs) typically take longer due to politics, even for the most experienced developers, but are effectively free, so worth being patient and persistent when they are available from the Minister of Finance of a sovereign government.

Similarly, but without the politics, our newest option, an Avalized Promissory Note (APN), may be less expensive or free of charge from the bank providing the aval.

In all 3 cases, the capital guarantee instrument itself would be preceded by a bank’s letter stating their intentions. See a comparison chart here and all RWA letters in MS Word template format in the Affiliate Proposal Builder or share our 2-page Pre-Qualification Worksheet with clients to get them to fill out the essential information.

See also the BG procedures, APN article (same procedure as the BG/SBLC), or SG procedures to take this forward.

KEY ACTION: Draft a filled-in version of the instrument verbiage, basic project description, uses of funds and drawdown schedule — these are what will gain pre-qualification and launch formal due diligence to gain a binding offer. These are the first 4 of 6 Essentials — and then upon receipt of the bank’s written signal of intent (as a signed RWA/verification letter) to deliver the pre-approved instrument once under contract.

B) No — sometimes “Hell no!” Objections that get voiced are good, as they can lead to solutions.

We’ve found they further subdivide into two categories: either because the developer B1 can’t or B2 won’t. You can ask, “Is that because you can’t or won’t?” or more precisely “Is a BG/SBLC seemingly out of reach because you [B1] don’t have the cash, or because you [B2] object on principle?”

Most often developers initially react with “both!” … but in practice, it is usually one or the other, and worth exploring a bit further, because both may be solvable. For a quick solution to B1, see article on the new Avalized Promissory Note approach, or keep reading. DO NOT OFFER THIS PIVOT TO AN APN TOO SOON. It will backfire. Avals are only available to well-qualified customers — those with a decent credit score and/or established relationship with the bank. Thus, an APN will not make up for a fundamental lack of creditworthiness. Leverage, sure, but you can’t leverage zero.

C) Maybe or Not Sure — they’re not sure if this will work, one way or the other, which just means there is information missing in order to form an initial opinion, and come to a yes or no, in or out. This initial uncertainty is distinct from making a decision about going forward, which can sometimes arrive too hastily. When that happens, slow the conversation down to make a better decision, based on facts and the latest information. Ask “how about if we take this one step at a time to be sure we’re including the latest best practices?”

At other times, the developer’s confusion about this is a form of masked resistance, and you need to surface their “bottom line” or unstated concerns or objection(s). This can take some creativity and experimentation, testing the waters, finding out whether they’re presently entertaining both Sovereign and Bank Guarantee options (thus, you can help them eliminate one or other other, in turn), if they’re unsure of whether they can find a CGP completion “sponsor” – a private company with self-interest in the project, such as an EPC firm or General Contractor – or reach an appropriate government contact within the Ministry of Finance, via diplomatic ties or similar connections). Perhaps they should try to “get there from here” and then report back? Set up a time for the next conversation.

The APN is a good backup plan if both of those more traditional (BG/SB) guarantees are out of reach. More on that approach here (intro article), with the verbiage and RWA templates available here.

This conversation with your client is the real work — put some skillful and focused effort into deciphering what’s in the way. We recommend that you stay in the conversation until you can precisely articulate back to the client exactly what they find objectionable and why they are objecting. When you get a “Yes, that’s it exactly,” then you’ve done them a service, as well as opened the door to some sort of resolution.

Do Not Accept “Maybe”, instant (superficial) “Yes,” or an unexplored “NO” as the answer!

This conversation with your client is the real work — put some skillful and focused effort into deciphering what’s in the way. Whether they say “a guarantee is no problem” or even flatly “no” to the idea, consider if they actually know what they are doing. If you and they end the conversation too soon you both lose. Of course, if you persist too long, become argumentative (resist their resistance), judge/blame, or fail to listen/learn, that’s also unlikely to work out well.

How much persistence is enough? If you are reasonably assertive, mostly by asking clarifying questions, you will get there. Rarely will asking focused questions cross the line and annoy the client, or drift into the realm of the pushy and obnoxious. But if you ask just to keep the conversation “open” and are not genuinely curious and interested in understanding their intended meaning, again, it won’t get results.

How you ask is as important as what you ask. Asking mostly “what” and “how” questions (but not “why?”) will enable you to stay in rapport, and continue the conversation itself, long enough to unearth the truth. That “truth” is often hidden at first. You want to be both assertive and cooperative at the same time so you can assist them with making a wise and informed decision, and not hurting themselves (decreasing their odds of success) or harming your relationship in the process.

We recommend that you stay in the conversation until you can precisely articulate back to the client exactly what they find objectionable and/or why they are objecting and/or why they like it. When you get a response like “Yes, that’s exactly it!” then you’ve done your job, done them a service, and taken an essential step toward their goal of securing project financing at the best-available terms. You’ve helped them head toward making a wise and informed decision as well as opened the door to some sort of resolution of the (perceived or actual) issue at hand.

At this stage, the conversation is about understanding their current status in relation to the stated goal of obtaining a capital/financial guarantee (also called “completion surety” or “credit enhancement” for the developer) and the expedited funding that it enables. You might even say out loud at some point, “My job is to help you make a wise and informed decision about this guarantee thing.”

Problem-Solving “Cheat Sheet” for involving an EPC/General Contractor as project guarantor

Handling the Two Main Objections

Lets further define B1 can’t and B2 won’t and then offer some responses to turn their objection(s) around — turn it into “can” and “will” or at least clarify their better or best options going forward.

(B1) Can’t – they presume they just don’t have the necessary seed capital resources to obtain an SG/BG, … they are unable to come up with the funds to cover the bank fees for a BG, or for an SG, can’t cover the out-of-pocket costs for travel and/or to wine and dine the appropriate government official(s). An APN may cost less, and not require underlying collateral.

As mentioned above, SG’s are nearly free (few countries still issue them), while BGs are faster and more expensive. The actual costs will be explored in the next section. If they say they don’t have the funds and can’t get a guarantee, find out if they are (like most) developers expecting and hoping to pay nothing further. See if you can find out why that is — already invested every penny into getting this far or just don’t want to spend any more? If the latter, skip to B2, Won’t.

SGs from the local government (Ministry of Finance) may be within their circle if they happen to use a host country that will still issue them. Discuss and eliminate that option before going further. SGs can take a long time, and since mid-2020 we have encouraged developers working in qualified countries to ask the government to instead instruct a rated bank to issue a Bank Guarantee/SbLC instead. You can probably assume that an SG is not an option with rare exception.

Then the conversation that remains is about obtaining a sponsor for a BG/Standby Letter of Credit (SbLC), which are effectively the same thing as the US and many other markets. The most common option is a well-established EPC firm that would be hired to construct the asset, or a general contractor (GC) or equipment OEM in some sectors. These companies tend to have a strong enough balance sheet and an existing bank relationship that they have the capacity, so the task is to support the developers by

Teaching them how to explain In3 CGP properly. The short version is that our funding’s requirement for a BG/SBLC is similar (in their world) to a completion bond and/or performance insurance. We use this capital guarantee to ensure completion and commission, which serves a similar purpose, but no BG/SBLC is an insurance product.
Helping them understand what type of EPC/GC/OEM firms should be considered. Hint: those that are large enough but not too large. They have to be a bit hungry for the work but have financial depth.
Building their “short list” of sponsor options, then helping them negotiate their “all win” arrangement with the leading 2 candidates.

When a well-established company handles project construction or otherwise has an active role or stake in the project, a BG/SbLC or APN can often be obtained without additional cost to the developer. This is the 80/20 rule: 80% of developers use this sponsorship avenue when they don’t happen to know wealthy people that could loan them the bank fee (0.25%-3% from most banks for a “cash-backed” instrument with an existing asset pledged as underlying collateral).

For those with access to a party that can cover the “margin” (cost of the instrument), itcan be structured as a bridge loan to the company and repaid via first drawdown of funds, 30-45 days after financial closing.

(B2) Won’t – based on willful refusal to do what it takes, for any number of reasons, that I would argue amounts to stinkin’ thinkin’ on their part. This objection can be countered with some skillful persuasion … see Handling Objections, below.

Moving the B2’s may take some persuasion and reasoning, but using our system of handling objections can accomplish exactly that! These exercises will sharpen your focus and improve sales persuasiveness across all aspects of life, not just enabling the funding of projects via helping the developer obtain a capital guarantee.

The Art of Handling Objections

Sometimes project developers or project sponsors (or their bankers) avoid stating their true objection. This is also common in countries and cultures, or with certain personalities, where there is a mystique (fear that is undiscussable) around being too direct or confrontational. They avoid revealing their “truth” because they would rather not lose the opportunity. However, consider these complicating facts:

a) They also harbor some fear of openly discussing their objection to it. They might not have the words to say precisely why they object, or what concerns them.

b) They don’t want to make a mistake. They are aware that if they don’t do the deal, they won’t get fired (unless their boss is in the room and detects that they are being irrational), but if they do agree to the guarantee, and it “goes bad” (whatever that means to them — again, that’s their fear talking), then they just put their job in jeopardy!

c) You can’t handle their objection if you unaware of it!

Question to put their cards on the table: “If you had a concern [objection], what would it be?”

In other cultures and with certain personality styles (several Middle East countries come to mind, or stereotypical New Yorkers, etc.) you’ll always know right where they stand. Typically that’s arm’s folded across their chest, or hands on hips, stating emphatically “No.”

Sidebar: Teaching negotiation skills in Kuwait I learned how important it is to object to whatever is proposed, at first. :>(

When an objection is based on a fact and legitimate reason for their refusal, such as the case of Category B1, they cannot obtain either an SG or BG/SbLC because they don’t have access to seed capital resources, or underlying assets, and they don’t plan to use a services firm or hardware vendor of sufficient size, and don’t have any wealthy friends or family they could ask for a bridge loan, that might be the end of that discussion.

The only other option would be a pivot to an Avalized Promissory Note, which in the hands of a credit-worthy party, would eliminate most or all of the cost, but by itself does not solve the problem of a developer’s standing with a bank. A “sponsor” would still be needed.

So, a fundamental disqualification sequence for project developers includes a “yes” to all four elements:
(i) They would likely need a BG/SbLC, but cannot cover the issuing bank’s fee, AND
(ii) They are convinced that no sponsor could cover such costs and/or offer a direct guarantee for the project, AND
(iii) no Avalized Promissory Note (APN) can be brought forward instead of the BG/SbLC because, like (ii) above, they are convinced that no credit-worthy sponsor would be willing to issue the PN and ask their bank for an Aval, AND
(iv) no SG is available because they are working in a country that does not offer them, which thus rules out this last free-to-them option.

THIS IS THE ONLY LEGIMATE “no can do” – when all 4 conditions, (i)-(iv), are true and immutable. That can be acknowledged without slamming the metaphorical door, putting the client in the driver’s seat for changing one or more conditions, then coming back to you with news that they have done so and are thus ready to take next steps.

In other words, with scenario B1, are they expecting 100% financing with absolutely no resources or contacts to make that possible? Only then are they just not qualified to use our funding program (at least not yet), and should be either told “good luck” if you’d rather not deal with them (or use a variation on in3finance.com/newclients to explain our position), or see Part 4, Affiliate Practice Management, below … if they have a project that otherwise fits our criteria (3 of 4 cornerstones, such as greater than $25M and in a sector we like), and seem professional and sophisticated (and speak/understand/write reasonable English), ask if they might raise some seed money on their own to cover the up-front fees, or hire you/us, which you would be wise to charge them, and which would be highly leveraged.

With that approach, they can reliably repay the seed investor plus substantial interest and/or a equity carried interest upon first draw of invested capital, 4-6 weeks of issuing the BG/SbLC or APN!

Tools & Resources: Other In3 personnel or Affiliates may be able to assist with bringing in a high-interest bridge investor (or represent same) when the take-out financing is CGP. This ensures that the bridge money would only be needed when the project’s financing is a certainty, as the last step before financing closing is to send the guarantee, covering the bank fee for the instrument. Otherwise, aside from CGP, the client has to show their project’s bankability to qualify for such an unsecured bridge loan.

Compare this to traditional project, with limited or no recourse loans, that will require an equity investor, and ask for a pledge of collateral (for Senior Debt) and usually also a loan guarantee for the life of the loan.

Also see Part 4, below, for why we should not agree to help them raise the seed money on speculation (without either a deposit or some sort of pay-as-you-go fee arrangement), with rare exception.

What part of “no” don’t we understand?

Of course, sometimes a “no” is just a “no” – it signals that they’re not destined to be a client, or that they are just not qualified – we don’t need to argue with the mules! But often the strongest objections can turn into the strongest commitments! So, don’t argue, listen and teach. But be sure not to wrestle with the pigs, because you’ll get all dirty and the pigs like it!

We often get offers to help companies raise seed money for a fixed upfront fee, and generally we decline because there is a low probability that any third party (us, as consultants) could raise funds that the project developer would have to repay. Generally, we don’t know the developers well enough to claim that they’ll act appropriately, and use the funds to obtain a BG; escrow agents help, but our reputation is worth far more than any consulting fee, so be careful not to get ‘in bed’ with strangers.

Part 2: Working with Sponsors and their Bankers

“Cheat Sheet” Guide to Gaining Sponsor/Banker Commitment to Deliver a Qualifying Guarantee

When developers lack the financial depth to guarantee their own project, we recommend they involve a “sponsor” such as a well-established EPC firm or General Contractor hired to design/build the project. Sponsors initially have concerns about this arrangement, whether or not expressed, such as

They do not yet know the funder and is without a direct relationship with them.
What if payments to the EPC/GC don’t start or continue per the established schedule?
Concern that the guarantee could be or will be called, or that its issuance could cause undue or uncontrolled risk exposure to the Contractor.

Answers via downloadable/printable “cheat sheet” (3-page PDF)

Campaign Services to bring in Sponsors as Guarantors

We have just now begun to build our list of EPC firms and General Contractors that are known to be open to bringing a BG/SBLC alongside (and as a precondition of) their service contracts. This usually involves either an enhanced service fee or an equity kicker in the project, or both, subject to negotiation of those terms. Check with us again later in 2021 as there are more firms being added as deals reach closing.

There is great diversity of interests and experience with EPC firms, OEMs, integrators and builders, so matching them with projects will take time. The other option is financial sponsors, typically private investors or asset managers in their own right, which remains a virtual whitespace of opportunity.

In3 puts its in-house clients in front of such financiers and gains the benefit of what presentations make sense to these parties, because they’ve typically not previously heard of this model, so it takes time and persistence to gain their mindshare.

To help clients determine which type of capital guarantee they wish to pursue (some sponsors will reject one type but accept another, depending on their objection), see in3finance.com/deciding-which-capital-guarantee-promises-the-most-advantages

Part 3 — Affiliate Practice Management

An effective financial services provider must also be an effective risk manager. This section explores how you can better mitigate your own risks as a financial services provider and In3 JV partner.

What are the main risks that must be managed or mitigated in order to succeed as an In3 Affiliate — which is a reflection on the client’s risk profile, as their success [at fundraising] is our success [getting paid for delivering value]?

When your clients can demonstrate that they will perform, and are capable of doing the majority of work that is necessary to gain access to project funding, then congratulations on having brought in such well-qualified clients. Now you just need to play out whether or not they will be able to qualify, prioritized based on our 1-5 scale indicating whether or not their project’s funding is actually feasible. The guarantee is relevant only when they fit CGP’s criteria ($25m or more, project finance, in a sector/industry we support) and the project itself has reasonably low commercial risk.

The customary commercial risks for project finance apply, and vary widely by industry (for renewables projects, for example, the offtake plan, creditworthiness of the buyer/offtaker, and in-country political risks may play in). Those risk factors are what we collectively refer to as the “Commercial Fundamentals”.

Our main funding for projects still carefully evaluates these Fundamentals, which boil down to securing the site, inputs, and offtake/sales plans, and accurately estimating the anticipated results (revenue and operating margins from operations over time). But we turn many of the conventional risks on their ear, making it much easier to predict the likelihood of successful funding.

We accomplish this in two distinct ways:

Process — we use a pre-qualification “test drive” to avoid going down with the ship in the event the client cannot perform. This 2-stage process saves you and us 90% or more of the time that would normally be required just to discover if the client has what it takes. With our Six Essentials, we don’t need to get into the weeds with a project’s detailed risk/reward profile until we know if they are going to qualify, with strong evidence and certainty “teased out” to justify further discovery and additional vetting before submitting the file for investor due diligence.
Project Finance Innovations — here is a summarized list of the key differences that transform the traditional risk profile into a set of advantages when using CGP funding:
1. State of Readiness: Investors seek projects that are close to “shovel ready” while In3 CGP does not mind projects that have a long way to go until they’re ready to turn dirt. In fact, we’ll pay for those remaining development steps without penalty (expectations for majority equity carried interest or control). In other words, RAIN scores at or around 80% (indicating the project is not yet ready for “prime time”) are fine with CGP.
2. Country risk — some private investors will only consider a few countries, those where they have invested previously, typically. The private ones tend to be much faster than institutionals like the various regional development banks, US DFC, World Bank IFC, etc., the main alternatives besides our private funding when seeking capital for projects in the developing world. We effectively have global reach, and embrace cultures, countries and currencies that most investors would refuse. Quiz question: what are the 3 countries that In3 cannot currently invest and why?
3. Currency Risk — although the capital guarantee must be in US$ or Euros, the financing itself can be in local currency.
4. Technology Risk — we can accept some technology risk, making this funding feasible when few to zero other project financiers would give it the time of day. Why? This breaks a strict rule born of the purpose of conventional project finance — the “cookie-cutter” approach that is extremely conservative, even a bit lazy, typically leveraging pension fund assets or other institutional money with a mandate to earn modest returns but never to accept any losses. This is why developers seeking to finance projects with new technologies (pre-commercial proof-of-concept) will otherwise face strong headwinds with getting through due diligence. There is no reason for sources geared toward such a risk-averse profile to consider it. With CGP, gaining support of a sponsor when there is still tech risk can be tricky, but performance guarantees (insurance) or involving an EPC / GC as a Joint Venture partner can help. Why? How does the developer / inventor know the tech will enable project completion and then perform adequately over time? We don’t need to be convinced (because the capital guarantee transfers the risk of non-completion to a 3rd party), but a sponsor might hesitate if this perception of risk is not reduced to zero. On the other hand, the family office takes on the risk that the tech will not perform once the project begins generating revenue, a risk we accept with eyes open — realizing full well that the project may ultimately lose money. By then, the guarantor will be out, free and clear, so if there is reason to believe the assets will get built and commissioned, the developer very well may be able to gain the required backing to secure our funding.

The process of pre-qualifying a project takes care of most risk factors for Affiliates. Then the main task is effective communication, which takes far less time and effort than the “deep dive” associated with vetting a project just to determine if funding is feasible. We can together “test our way in” using Lean / Agile / Scrum methodologies — first we determine using 4 of 6 Essentials if there’s a fit between the deal at hand and In3’s funding mandate. Deliver all 6 Essentials, with proper expectation setting as part of that, and the odds of success go up considerably. Then the only risk is typically whether the client is “telling it like it is” or distorting the truth just to get attention they probably did not deserve in the first place.

Can you ask for evidence of all the claims they are making? Adjust their Feasibility score from a 3 (default score when they appear on board, prior to your vetting) and stay with it until they are either funded or disqualified.

What Conventional Risks Go Away with CGP?

One of the main advantages of CGP is the use of “alternative” funding pathway because it changes the risk profile for all of us as financiers. Our funding partners manage to eliminate our risks in several traditional areas — such as country risk, currency risk, completion risk, and more. The Family Office already agreed to accept these risks and we will still get paid if they can bring in a suitable guarantee (2 of the Six Essentials — instrument verbiage and bank letter), alongside an acceptable Uses of Funds and monthly draw schedule.

In3’s partner are willing to finance into almost any country, using local currency, where the guarantee serves to offset the risk of non-completion. Handled!

The other common risk that knocks many projects out of contention for funding is credit risk. A common sign that a project’s developer is not creditworthy is when they require 100% financing, without a meaningful contribution of equity from their side. We accept this risk of excess leverage (debt-to-equity ratios the traditional measure) by transferring it to the guarantor. This explains why some developers struggle with the guarantee at all — it provides credit enhancement for the borrower, and some prospective sponsors can sense this is an issue — or at least not a strength of the developer’s proposal. Do such developers deserve to raise funds anyway?

On occasion, we will enter a Management Services Agreement (MSA) with a well-defined scope of work, which requires either a fixed-fee or retainer basis to either …

a) Help build your client’s investible package for them, or

b) Find an appropriate sponsor from our own network.

We would only agree to work in industry sectors where we have close ties to appropriate investors, mostly in renewables. Further, we would screen out developers that score a Feasibility of 1 (largely uncoachable) and very cautiously proceed with those who score a 2 — coachable, but have limited in-house skills or connections for making their funding reasonably attainable.

How In3 Affiliates can help developers obtain project capital guarantees

Confidential Memo for In3 Registered Affiliates, Staff and Joint Venture Partners