In a recent post, we outlined the role of first debt facilities in helping climate originators gain early traction. We now turn to the process that is required to raise these facilities, and, crucially, the steps that climate originators can take to accelerate the process of raising this capital at better terms.
Off-balance sheet debt facilities are a critical tool for climate finance companies. As we have written about in previous Ezra Insights articles, they can be an ideal source of capital for several reasons—including the fact that they are structured against customer assets and typically are sized and may be tenored to match those cash flows. This can protect originators from existential risk in the case of poor loan performance, and improve the terms of the capital made available.
However, raising these facilities is a complex and difficult process today. This is for a number of reasons, including:
There are a number of steps that climate companies can take before entering negotiations to mitigate these issues. This entails more than just having a clear idea of how much capital is required and the ideal rates on offer from lenders. Rather, it spans all of the processes, data, and expertise that lead capital providers to view an originator as ‘a good borrower.’
In our experience, investment in these processes, data, and expertise can meaningfully accelerate the process of raising off-balance sheet financing, and improve the outcomes of negotiations.
Developing a debt facility strategy: Raising an off-balance sheet facility is a strategic choice that climate finance originators can make in order to spur early growth. Companies should set out to define a clear roadmap for raising this kind of capital, including the optimal facility size, terms, timeline, and how it forms a glidepath to larger warehouse facilities in the future. Companies should also lay out a list of potentially-suitable capital providers to target, and develop an outreach strategy for them (See this a16z mapping of capital providers as a starting point).
Building a thorough loan management process with a competent tech stack: Loan disbursement, management, and monitoring are a critical components of any off-balance sheet facility. Many capital providers will have strict requirements in place to ensure that originators are correctly overseeing these processes. Climate originators can pre-empt these requirements by ensuring they have effective tools and systems in place. This will improve the perception amongst capital providers of an originator’s ability to responsibly disburse and manage capital. (It will also accelerate the time it takes for the deal to close and funds to be transferred.) The following are examples of what we expect from originators ready to receive capital from lenders:
Preparing a data room: The climate space has unique types of assets and is rapidly expanding into new geographies and customer segments. As a result, many capital providers will not have deep familiarity with the kind of lending that climate originators seek to undertake. These originators will have to put together comprehensive data rooms in order to address many of the questions that are likely to come up during the capital raising process. We have seen a variety of data room requests from different capital providers in our experience building climate originators. The following is a list of documentation and data that any climate originator should have prepared in advance of negotiating an off-balance sheet facility:
Originators should make sure that they have expertise—be that hires, contractors, or consultants—across three key areas:
Credit and risk expertise: Climate originators will need to ensure they can match the deep experience on the other side of the negotiating table. Small details in term sheets can have significant implications for a business. It is critical to have someone who can dissect potential agreements and interpret their implications for the business. Moreover, there are a number of internal policies and processes that are required in order to make an originator both a good lender and a good borrower. Originators should ensure they have someone leading both of these elements within the organization.
Capital markets: It can be difficult for originators to identify suitable capital providers. Even when potential fits have been found, many require a warm introduction. Originators should ensure they have a capital markets expert who can help navigate potential capital providers and begin conversations.
Systems and technology: Effective data and technology systems are critical parts of the lending process. It is important to have technological leadership who understands the different components required for an effective lending tech stack.