- Groundwork
- Market Engagement
- Groundwork
- Market Engagement
Is it possible to use repayable finance upfront to meet any of the costs?
Repayable finance from investors – typically debt or equity – is not always necessary in nature markets if upfront costs can be met by the buyer or through grants.
It’s also important to note that, even when repayable finance is needed, farmers do not necessarily have to secure this themselves.
In the UK, there are very few examples of individual farmers taking out loans and no examples of farmers issuing shares to use specifically to finance a nature market project. Typically, the upfront capital required is organised by a third party – for example, a third-party project developer, a broker etc.
However, as nature markets develop further, and in the case of larger farms, there is potential for farmers to secure repayable finance and meet up-front costs, as with other parts of their business.
The below therefore sets out some questions that farmers (and, more likely, third party project developers) could ask themselves to secure repayable finance from lenders and investors, whether that’s taking on finance independently, or as part of a larger group or partnership.
This milestone contains three subsets of considerations or ‘themes’ that farmers may want to explore at this stage. Click on each of these themes to the right in order to read more.
You can also read case studies of projects that have successfully completed this milestone of development and view a summary of the common activities undertaken at this stage below.
Defining the need for repayable finance
The first step is always to assess your own needs, including how much money you need up front, what you feel comfortable to offer as a return, and what type of repayable finance you’re looking for.
You might not initially be able to fully define your needs, but if investors are interested, they will generally be willing to work with you early on to co-design the investment ask.
To start defining your needs, a lot of insight will come from your cashflow forecast / partial budget (see Milestone 5), which you’ll probably iterate on several times as you consider different investment proposals. You’ll also have your own preferences and needs to consider.
This seems like an obvious question, but investors will ideally want to see a firm number you’re asking of them that won’t change too much during negotiations, and a clear explanation for what this investment will be used for.
For example, is the investment to pay for extensive ecological works on the new habitat, or will this also cover any legal fees that you need to close the deal?
Investors and other stakeholders will likely want to see that you’ve explored other possibilities to justify why the use of repayable finance is the best option for you and the deal.
Other sources of finance in nature market deals include:
- early payments from buyers – noting the difference between buyers and investors,
- government / philanthropic grants and donations that do not require repayment,
- working with a third party project developer and using their balance sheet, and/or
- use of your own funds
Farmers generally have experiences with both debt and equity. You and any other farmers you’re working with might have an early preference for what type of investment you’ll seek, which will affect how you structure your ask.
For example, equity is typically more expensive than debt and involves giving the investor direct ownership – such as in the new legal entity that you’ve established for the deal (see Milestone 6). This also tends to be more expensive as it comes with greater risk to the investor.
On the other hand, debt can be more preferable as the lender doesn’t have a claim on any extra profits that the deal gives you, and it does not dilute any ownership rights. However, taking assets – such as the land itself – as security is more common with traditional debt in order to lower interest rates. This can be a major deterrent for some farmers, including tenants and those that already have charges on their land.
It will probably take more time with your cashflow forecast to map out the proposed timings of repayments to your investor. Some questions around this can include:
- When can I afford to start paying this back, based on the income from the deal?
- Do I need a grace period where I don’t make any repayments for a while?
- Over what period of time could the investment be repaid fully?
- What is the timing of these repayments? Are they staggered or is there one large repayment in the cashflow?
- Can I build in event triggers, such as repayments required only when a sale to the buyer is made?
Almost all investors will need a return on top of the repayment, as reward for the risk they are taking with their money.
In your cashflow forecast, you can estimate a rate of return to help you understand what types of investors would work for your project – as different investors will have different return expectations.
However, there are different ways that investors calculate rates of return – such as ‘Internalised Rate of Return’ vs ‘Return on Investment’. Many investors will work with you to explore this number early on if you are not sure what you’re comfortable estimating.
As part of normal due diligence in negotiations, all investors and lenders will work through the figures themselves to make sure this return is correct and what they are looking for.
Approaching Investors
The type of investor you will want to approach will become more evident as you gain clarity on what the upfront capital you require and what you can afford to pay back.
However, if investors are interested, they will also be willing to work with you early on to co-design the full investment ask. While it’s good to be prepared as much as possible, don’t feel that you have to have all the facts immediately.
Some investors can offer both debt and equity investments, but most will have a defined investment route that aligns to their risk appetite, preferred level of engagement and returns. Below are some investor types that have been involved or interested in nature markets to date:
- Impact investor funds exclusively target investments with both a financial and environmental or social return. They have been known to offer debt and equity investments, and lower rates of return for deals deliver multiple benefits to the environment and any local communities.
- Venture capitalists, angel investors and High Net Worth Individuals (HNWIs) typically make equity investments by purchasing preferred or common stock – though this would likely only appeal to farmers if you’re creating a Special Purpose Vehicle (SPV) for the deal (see Milestone 6) that is ringfenced from your main farm business. High Net Worth Individuals also may provide low interest rate loans. There are examples of individual high net worth investors lending to community solar projects and to Wildlife Trusts, for example.
- Commercial banks – especially agricultural and environmentally-focused banks – are showing more interest in the potential to lend in nature markets. However, there aren’t many examples of them lending yet. You may consider talking to your own business bank, or one that has expressed views on nature markets publicly, to start a conversation about the possibility of them lending to your deal.
- Crowd-funding investments from large groups of individuals, such as Crowdfunder campaigns could be an option if your deal also has a strong social element. It can also be either debt or equity based. However, you should be mindful of fairly representing the risk profile of your deal, as these individuals will likely have both a lower risk appetite and a lower capacity for due diligence compared to more established investor
Finding specific names to approach list can be challenging. Consider speaking to your project partners and/or development funders for recommendations on potential investors. You can also connect to networks of investors that have a focus on nature-based or sustainability projects, such as the Green Angel Syndicate, the Social Impact Investors Group and the Environmental Funders Network.
There’s no rule to say you need to prepare a suite of glossy documents to impress an investor on first approach, but they are likely to ask for materials early on to build an initial understanding and have things on file that they can share internally.
Examples of such documents include:
- An Investment Teaser – A one or two-page document that is a brief summary of the proposed investment. It usually includes an overview of the deal, the investment ask and the unique selling points, among other high level details.
- A Term Sheet – Farmers are generally familiar with term sheets, which show the main terms. You can use a term sheet if you’re confident in the particulars of your investment ask. It is usually presented as a table and contains elements such as the investment amount, interest or dividend repayments, security offered, use of investment and conditions precedent and subsequent. The key parties usually sign the term sheet, but this is a non-binding agreement that the parties can withdraw from without legal penalty, and can be altered as negotiations go on.
- Expression of Interest (EoI) – An EoI is a non-binding form or letter that is sent and signed by stakeholders in the deal. As the name suggests, it is literally used to express the level of interest a stakeholder has in the deal. Giving an investor the EoIs that you’ve received from other stakeholders, such as the buyers, delivery partners, Code / Standard bodies etc, can help to convey the likelihood and potential of the deal.
Investors will need access to more information as negotiations progress – such as your cashflow forecast, but these early documents can assure the investor the degree of work and consideration that has gone into the deal to date.
You can also use a standard NDA in case you’re worried about any commercially sensitive information being shared. You can find a template of an NDA in the Useful Links section of this Milestone.
Consider researching each investor’s criteria and what nature-related deals or enterprises they have previously invested in.
If the investor has no publicly available investment criteria, then the surest way of finding this out is to speak to them directly. Investors are generally collaborative and open to an informal discussion about the investment case before negotiations begin in earnest.
It’s also advisable to think about what makes your own deal unique. For example, where a farmer is looking to combine or stack the delivery of biodiversity and nutrient units on a single site, an investor may be interested in the potential to extend this model to other habitat bank investments it has made. Alternatively, you can approach investors that are local, and stress the social and economic benefits that the deal is targeting, such as job creation and social prescribing.
In any case, you can build a narrative as to why this deal is unique, but would also be a well-suited addition to the investor’s portfolio.
As the landholder and de-facto seller, you will be a crucial stakeholder in the deal and you could approach investors on your own. However, depending on how developed your deal is, you might also bring in other stakeholders, such as the prospective buyers, supportive environmental charities, or consultants that you’re working with to these initial meetings, or even further down the line in negotiations.
This could benefit the investor’s impressions as it would demonstrate the support and consideration from different stakeholders that are needed to make the deal viable.
Negotiating the best deal
At this point, you’ll have one or more potential investors in the tent that are hoping to explore the deal in more depth and negotiate on certain points. It’s just as important to think of what you require from investors, as what they require from you in these negotiations.
However, this process is also important for building a strong relationship with a potential core stakeholder in your deal. Investors generally want to be collaborative and supportive to design the finances. In this process, you can think of what relationship you’d like to form beyond the financial transaction itself.
Due diligence is a broadly used term that refers to the investor digging into the particulars of the deal to make sure it’s a reliable investment for them.
You’ll generally be expected to share the full cashflow forecast, and other details like the targeted environmental outcomes, the risk management strategy, who is involved in the deal (such as key delivery partners).
Anecdotally, due diligence can take between one and six months, but the timing is very investor dependent. Most due diligence processes fall within the two to four-month timeframe.
It’s generally in the interest of all parties to conclude due diligence as quickly and efficiently as possible, without compromising investors’ understanding of the project, as this process takes time and resources for all involved, and a drawn-out due diligence process can also delay project timeframes.
As part of due diligence, your investor may come back with requests and amendments. Below are some examples of what investors may want to change in your original investment ask:
- Requesting a higher rate of return than originally offered by the project, or asking to be repaid sooner than modelled.
- Offering an equity investment, instead of long-term debt.
- For you to commit some of your own capital, as a means of demonstrating your commitment and aligning incentives.
- To have decision-making capacity, such as through a registered Director position within the legal entity hosting the project (see Milestone 6).
- Additional security, in the form of collateral, guarantees, cash buffers, or insurance.
- Certain reporting requirements, such as tracking the project against the investor’s own Key Performance Indicators (KPIs) of their investment portfolio.
Securing repayable finance is rarely just a transaction – it’s also building a relationship with a new core stakeholder in your deal. As you progress in your engagement with potential investors, you can think of how this relationship is developing to be collaborative and mutually beneficial. Investors will generally be keen to build this relationship with you.
Below are the common points that project developers and investors alike list when they think about positive relationships:
- Alignment of values, strategy and environmental / social impact.
- The right investment on the right terms.
- Regular communication – including sharing on the good news stories and successes of the deal.
- Profile raising and public representation of both the deal and the investor’s contributions.
- Ad hoc advice – such as commercial and financial planning.
- Access to connections and wider networks – such as other project developers, supportive government initiatives, and service providers.
This is usually something that is clarified later but still important to consider before you come to a full agreement, as your reporting burden can stack up as you build your deal.
Buyers, grant funders, Codes and Standards, other farmers, local government – these are all groups that can ask for regular updates on key aspects of the deal, such as the state of the habitat, or how the cashflow is progressing.
Where possible, try to align your reporting obligations and don’t be afraid to say to the investor if you feel that what they are asking is overly burdensome. Investors are collaborative and generally open to compromise.
Investors will want to see a future income stream that can repay them, but also the strength of your contract, which means you have a well thought-through legal contract with your buyer(s) that makes this income stream more robust.
This can result in a chicken and egg situation, as buyers will likely have reservations on developing a full legal agreement if they’re concerned about whether you have the funds in the first place to meet all the activities of the deal.
Non-binding offers can provide assurance to both sides without legally committing anyone to the deal or its related activities. If you have buyers that are interested, you can ask them to sign a Memorandum of Understanding, or Heads of Terms that set out what has been informally agreed. You can then use this as leverage in any negotiations to build a better relationship and more favourable terms for the repayable finance.
This works also both ways – you can show your buyer any similar non-binding agreements to increase their confidence, and aid in negotiations on pricing and payment schedules.
