Who are Investors?

Investing in units, projects, land or habitat banks is a very different proposition to buying units. Whilst they may have different reasons to get involved in natural capital markets, both are using them as value stores and/or as appreciating or enabling assets. The fundamental difference is that the ultimate intention of any investment is to make a return on that investment.

Many of the considerations in the Buyers Business Case section are relevant to the Investors Business Case, Investors are likely to scrutinize these factors even more closely, as there will likely be high levels of due diligence. The Proposition| Quality| Risk| Management &  Commercial graphic on the Buyer’s Business Case Page also applies to Investors.

Investing in BNG may be either investing in:

  • A project that will produce BNG Units
  • the land that may host a BNG project
  • A complete project that has not yet issued its units
  • Units that have been issued

Types of Investment Opportunities (BNG)

Appetite For Risk
  • All investors want to make sure they understand the risk, but different investors have different risk appetites and are investing for different reasons.
  • The investment may be partially for public relations or marketing purposes relating to Corporate Social Responsibility (CSR) or Environmental Social & Governance (ESG)
  • The graphic (below) illustrates typical factors affecting an investor’s risk appetite

Types of Financing from Investors

Projects should research and develop the financial model at an early stage. Depending on the structure, the types of finance available may be restricted. To raise capital, there are two main financing options available; equity and debt finance.

Most business propositions use a combination of these two financing options. But either way, investors will always want as much certainty as possible. Investors will want to know about:

  • What the risks?
  • How will they be managed?
  • What guarantees and conditions are there?
  • The return on investment over the next 5, 10 and 20 years?
  • What are capabilities, expertise and capacity of the provider?
  • Examples of achieving success with similar projects
  • Evidence and reasonable business and financial plans
  • Who else is investing, what are the funding streams?

Size of Capital Investment

The amount of capital being invested (sometimes called 'ticket size') is variable, however most major fund management institutions only look to invest very large amounts in  the multiple millions.  These entities usually have funds undermanagement, who are unlikely to write a 'ticket' for anything less that £10m.

This is likely too large for most natural capital project, but the problem is solved by the investment supply chain, whereby large amounts are marked up and invested into a series of smaller investments by intermediaries, these smaller investments could be applicable to natural capital projects.

 

 

Key Takeaways
  • Understanding project size, and who to approach for investment is important.
  • A number of specialist fund managers e.g. Social and Sustainable Capital, Big Society Capital, Altana Wealth typically provide £500k -  £2m.
  • Still large amounts- may need to consider bundling of projects to attract investment

Eliminating Uncertainty

Investors do not like uncertainty.

Drivers of uncertainty include shifting policy, and lack of regulation and standards. This means that new markets are usually vulnerable to uncertainty. However, most can develop certainty over time via trade associations, voluntary standards, and or regulation, and therefore can be more safely invested in.

The BNG market is new, however there are relatively strict policies in place via legislation, and as well as standards and guidance. Local Authorities in the LCR are working collaboratively on a standard for BNG habitat banks.

 

 

 

Partnership Opportunities

A partnership opportunity between an project manager and 'Offtaker' may work well in some natural capital markets. The 'offtaker' enters an agreement with the project manager whereby the project manager developers and runs the natural capital project, and the 'offtaker' provides an agreement to buy any units/credits produced, and may also provide investment. Both parties can then also work together to seek other investment, with a proposition which is massively de-risked.

Full service real estate companies, such as CBRE, may also be in a strong position to broker partnerships that include investment, from within their own holdings, resources and client list. Adding value to two types of client and awarding themselves an investable opportunity at the same time.

Example in the BNG market
  • 'Offtaker’ = developer who need to purchase large amounts of Biodiversity Units, and doesn't want to risk lack of supply in the market, or having to purchase national credits.
  • 'Offtaker’ will look for a project manager (such as an environmental organisation) who will develop, own and operate the habitat bank.
  • Both parties enter an agreement where the offtaker will purchase all units produced.
  • This means both parties have security and can seek investment in the habitat bank jointly, with a very strong investible proposition.