Sustainability Financing Companies See ‘Huge’ and Growing Market

It’s a well-known dilemma facing developers of sustainability projects: they need investment capital to get their project off the ground, as well as to develop the industry to the point where more money flows in. But the longer time horizon that most distributed sustainability projects need, as well as their smaller size, tend to be unattractive to most traditional financing sources like banks and venture capital funds.

Financing of sustainability projects today is a huge challenge “because the customers have no money,” says venture capital veteran Tom Cain. “When you think of sustainability, you go out to those marketplaces, and they have no available funds to acquire whatever the innovation is.  That’s the biggest problem.”

Yet the demand for financing is there, and the market – already “huge,” Cain says – is expanding constantly. Sensing a solid business opportunity, Cain and others from the venture capital space are launching or otherwise supporting new companies and financing platforms that look to solve this dilemma and capture some of the multibillion-dollar industry for themselves and their investors.

One is GSV Sustainability Partners (GSVSP), founded by Cain and GSV Capital as a subsidiary of the publicly traded GSV Capital. GSVSP focuses on infrastructure as a service, which it calls “sustainability as a service.” In that arrangement, GSVSP owns the infrastructure and provides the equipment or system to the end user. That customer contracts with GSVSP to operate the infrastructure asset, gaining the use of the technology while paying nothing up front.

Sustainability as a service can encompass a wide variety of sustainability products. For instance, Cain says, “We’ve got fleets of compressed natural gas (CNG) trucks, which GSVSP owns on behalf of customers and shippers. And we have water systems for homeowner associations. These projects are on our balance sheet, not the customers’, because we provide them as a service.” Cain says these “product placements” can range from $100,000 to $50 million dollars in size.

Third-party financing is a “critical lynchpin in the ecosystem” of renewable energy, says Scott Jacobs, CEO of Generate Capital, another of the innovative financing companies in the space, which launched in December. Jacobs points out that third-party financing is what “ignited the implementation of solar in the United States, from a tiny little sub-billion-dollar market to tens of billions of dollars worth of solar being deployed today in the U.S. alone,” and he wants Generate to help bring that development to sustainability and resource-efficiency infrastructure as well. Jacobs previously helped found McKinsey’s clean tech practice as well as EFW Partners, a venture capital investment firm focused on energy, food and water.

Generate Capital is not a fund but, rather, follows a “very traditional specialty finance company structure,” Jacobs says: a balance sheet business with shareholders instead of limited partners, and permanent capital instead of time-limited capital. “That was a key part of the strategy so that we could be a true capital partner to the community we serve, which is project developers and technology manufacturers who need financing to be able to offer their products as a service,” he says.

One of Generate’s cofounders is Jigar Shah – the founder and former CEO of SunEdison, the first CEO of the Carbon War Room, and a former managing partner of Clean Feet Investors – and Generate’s team members have been “active in the space” for about a decade, Jacobs says. “So for the most part, the origination of new opportunities comes from our existing network,” he says. “But we are proactively speaking with project developers and technology manufacturers that have solutions that we think would benefit from a financing package to go alongside it.”

Another innovator is Black Coral Capital, the venture capital firm that works on behalf of an undisclosed wealthy family. In addition to making venture capital investments in cleantech startups, the firm invests in project finance companies and platforms, while also providing project financing for the clean energy and sustainability projects that those companies develop.

“We typically do not provide stand-alone project financing without a venture investment, as we see the most synergies both for the company and for ourselves by using a hybrid approach,” Vice President Nikhil Garg says. “We often see this need emerge with early-stage, sub-scale platforms or emerging business models, where we can leverage our flexible capital to get them off the ground while also generating outsized returns.” He says Black Coral is helping to fill the funding gap for projects that are below the $50 million to $100 million range and that may be utilizing a recently commercialized technology or a new business model.

The firm’s flexible capital gives the “opportunity to significantly de-risk the investments and boost the returns,” Garg says. “In a world searching for high-yield investment opportunities, this is a market with enormous potential and a lot of capital – on the order of trillions of dollars – to put to work. And there are a lot of LPs out there looking for those types of investment opportunities.” The future of early stage funding in the industry will look increasingly like private equity or “a hybrid type of capital that recognizes there are opportunities across the spectrum,” he says.

The projects that these financing companies have funded are diverse. For GSVSP’s compressed natural gas venture, “we will buy a fleet of trucks and provide it to a trucking company on an arbitrage between their price of diesel and the price of CNG,” Cain explains. In another venture, “We will buy a bunch of advanced energy-efficient electric motors and have them installed in a water utility, and we will take a percentage of the savings between the old motors and the new motors.”

The CNG project has been hurt by the drop in oil prices. But GSVSP is well placed for an eventual rise in prices, Cain says. “If oil pricing comes back and the arbitrage comes back between the prices of CNG and diesel, that could hold some weight and become larger than anything else quickly, because the machinery to make it larger already exists,” he says.

Among other projects GSVSP is looking at are LED lighting in buildings and water projects, particularly in drought-hit California. “The water potential in California is huge, and I think in California all kinds of water innovations will be good in 2015,” Cain says.

The project developers and platforms that Black Coral has funded include One Roof Energy, which does financing for residential rooftop solar projects. Black Coral is also backing Noesis Energy, the online platform that matches energy efficiency projects with banks and other potential investors.

Another investment is Clean Energy Collective, which builds, operates and maintains “community-based” clean energy facilities and, Garg says, is a good example of what his company likes to support. Black Coral invested in CEC’s Series A venture round in 2012 and its Series B round two years later, while also providing project financing for the development of CEC’s community-owned solar projects, alongside corporate capital and sponsor equity.

Black Coral is looking at urban agriculture as well. “That’s an area where we see innovative models creating a bit of a hedge to the overall food supply as well as addressing a different segment of consumer preference and demand,” Garg says. He, too, sees potential in water. “I think we are starting to see the emergence of some interesting distributed scale opportunities,” he says, particularly what Garg calls “some very large scale opportunities” in desalination and water treatment infrastructure.

Jacobs says Generate Capital has “three broad categories of opportunities where we are underwriting: electric generation, resource efficiency and waste to value opportunities.” The firm is also active in improving agricultural productivity. “We talk a lot about productivity and the notion of doing more with less of our resources, and that is really the underlying theme here,” he says. “The infrastructure projects that we are funding are resource productivity projects. Food & Ag is a big category, and we have already been active in that space.” The company targets deal sizes of $20 million and below and expects to announce a number of projects early this year.

There are other players in the specialty finance space today, including TPG Alternative & Renewable Technologies, an affiliate of private equity firm TPG Capital, which partners with companies that are developing and deploying renewable technologies and infrastructure. It has provided financing for VitAG, which recycles byproducts into specialty fertilizer; Genomatica, which develops green chemicals from renewable feedstock; and Alphabet Energy, a developer of modular thermoelectric products that transform wasted heat into electrical power.

Equilibrium Capital, an impact investor, is a holding company building a portfolio of operating companies that manage “real assets” in key sustainability sectors, such as water, agriculture and energy efficiency in buildings. Equilibrium is also developing innovative investment vehicles for institutional investors. According to CEO David Chen, the company’s intention is to help “scale up” sustainability practices through innovative environmental finance transactions to the point that they can prove to be stable, repeatable and understood enough to attract “plain vanilla” capital.

Another impact investor, EKO Asset Management Partners, develops and implements innovative approaches to financing conservation and environmental sustainability, including providing private equity and debt to environmentally related assets. Its investment focus is on carbon, sustainable food, and green infrastructure. According to co-founder and partner Jason Scott, EKO is seeing “institutional scale interest” in agriculture and water deals. A recent emphasis has been developing investment vehicles that create financial incentives to reward more sustainable fishing practices. EKO is working with both the Rockefeller Foundation and Bloomberg Philanthropies on that project, he says.

Overall, the market for financing these types of companies and projects is “enormous” right now, Jacobs says, and he expects it to get crowded soon. “We anticipate a significant amount of competition from lots of angles – from traditional capital sources to solar finance companies, to new boutiques and new models that may emerge to address this opportunity set that is very large and growing quickly,” he says. “There’s plenty of room for a lot more than just us in the space.”

Cain, too, sees tremendous potential for GSVSP and similar companies. “It’s a huge, huge, huge market,” he says. “It’s a land grab at this point.”


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