Criteria for promoting bankable greenfield forest investment opportunities in the tropics
As my work builds with investors seeking opportunities for their nature-based solutions strategies, and with project developers seeking funds in the tropics, and the interplay between the two. I commonly witness the well-known disconnect between the investor looking for an investment-ready greenfield opportunity, and the project developers promoting them. In this article, I reflect on my interactions with capital seekers and deal seekers to provide some insights for the developers, so that they might put their best foot forward when given the opportunity to present their project to an investor.
Transitioning out of the NGO mindset
As the investment community begs for more high-quality, additional, nature-based investment opportunities, early-stage greenfield forest investment opportunities often best fit the bill. The challenge is, investors still require the project developers behind these opportunities to have a strong track record, and a solid investment case for the business to be able to stand on its own two feet (and not be dependent on grant funding).
Too often deal opportunities that are in this early-stage cross my desk, they emphasize the wrong things (at least wrong for an investor). They have commonly started out as an NGO development project and carry with them traditional development aid mentality. What do I mean by this? Have a look at the bullet points below, and if you see your project somewhere on this list, please, please, continue reading!
- Long narratives on the general social and environmental challenge that the project is resolving,
- Track record is presented in terms of number of trees planted,
- Market data is either absent or extremely high-level, coming from some global thinktank or multilateral organization’s research,
- There is no clear description on what is being sought from investors, nor what will be done with the investment capital,
- There is no mention on what the returns will be for the investor (financial, carbon, or impact).
Let me explain by presenting an anonymized example of such a project. I’ll explain where the pitfalls are in their investor presentation. This project is a synthesis of a real project in a NBS land-use space that is highly attractive for investors. However, despite the potential opportunity here, the construct of the deck was such that I believe an investor reading it would not have gone past the second slide. Read below to find out why.
An example of a Pitch Deck Pitfall
- The deck indicated how many trees have been planted (number was in the thousands, which for a serious investor is an immediate red-flag), they did have a target to multiply this ten-fold, but did not demonstrate how this would be achieved, nor how much investment this would require.
- The deck provided a bullet point CV of activities that the organization carries out, but no outcomes (apart from trees planted) as to what they’ve achieved.
- The investment case was non-existent, and only the impact case was provided. At that, the data provided was very high-level and not specific to the project (for example, the amount of carbon that can be stored by this type of land-use (not for the project itself), general information on biodiversity associated with this land-use).
- Objectives were unspecific (such as create awareness on conservation, introduce livelihood alternatives, promote clean cookstoves),
- Project aims were not confidently described – for example, planned activities would take place “possibly” within X time frame.
- High-level expected project outcomes were provided, which is a good thing and an important part of any impact investment’s theory of change – but from an investor’s perspective, quantifiable outputs (targets) are needed.
- The project description was very lengthy without having any substance as to what was going to be carried out.
- Financial model – there was no financial information at all presented. Not how much is required, nor the financial returns possible, nor how much has been invested or managed to date.
- Market information – there was no mention of the return drivers or markets that this investment would access.
Too often investor presentations completely miss some of the most important elements of a pitch deck – the amount of investment being sought, what that investment capital will be used for, and what the investor will receive in return.
The role of Seed Funding
Now, I’ve come down a bit hard on grant funding and the donor development model in the investment lifecycle. But the truth is, there is a real need for “no-cost” capital at the early stage of forest investments in the tropics. The caveat is that this capital needs to be used smartly with a clear plan for moving away from donor dependence.
Greenfield forest investment projects, compared to most asset classes are burdened by the fact that they are several years away from generating cashflows, and the early days require the most intensive capital – as nurseries, roads and other infrastructure are developed, other CAPEX is purchased, and several administrative elements need to be taken care of before a tree can even go in the ground – such as securing land tenure, acquiring the relevant permits and securing a social license to operate.
This funding can take the shape of several forms:
- Repayable grant – Project finance that is provided as a grant but is repayable upon the project later securing investment. Here the donor takes the risk if the project fails to raise investment funds, they will not be reimbursed,
- Carbon certification feasibility funding – Finance targeted to prove certain carbon certification eligibility assumptions and crediting projections. Here the funding provider normally agrees to further investment or a carbon credit purchase agreement upon favorable assumptions being verified. This is increasingly becoming an important piece of project finance.
- Impact grant – Project finance that does not expect the grant to be repaid, but instead wants to see certain environmental, climate or social outputs delivered. These may be staged milestones, whereby more funding is released upon milestones being achieved.
Criteria for Promoting Bankable NBS Projects
If you are a project developer seeking investment to execute your NBS project, below is a summary of items you should include within your business plan, and pitch – so that you can move beyond a request for a teaser or that first introductory investment call. This is applicable when seeking both seed capital and more traditional investment.
- Financial Model
- The financial model should include annual cost expenditure, revenues from different income streams, price assumptions, overheads, break even point and when the project turns to cashflow positive etc.
- Go easy on the blah blah blah
- Avoid a lengthy narrative on general climate, market, environmental and social challenges. The investor already knows this, or they wouldn’t be looking at your opportunity. A brief overview is of course useful, but very brief!
- Get specific on the opportunity
- More relevant than overarching global challenges and solutions, are specifics on the local challenges and solutions of your project’s context. This could be national statistics, or real market information pertaining to your opportunity. It should be evident that you really understand the local context, which will give confidence to the investor.
- The “Ask”
- Make it clear how much funding you are seeking, the type of funding you are seeking (seed funding, equity, etc.), explain what the funds will be used for, over what time period and what the return expectations are for the investor (IRR, impact, carbon credits
- Your Track Record
- Describing your experience is critical. Think in terms of what an investor is going to be looking for – your history of developing similar projects, the outcomes you achieved, and the financial capital you’ve managed.
- Back of the envelope carbon calculations and impact potential
- Now this is only relevant if your project is proposing carbon credits, but it also applies to other markets and impacts. You should provide at least preliminary carbon credit projections, but also elements such as number of jobs, area of habitat to be restored/protected, etc.
- Demonstrate your own Investment
- The data presented in your investment material should show that you’ve invested your own resources (time and/or money) into developing the investment case. This could include setting up a local presence, a lease agreement with the government securing land tenure, market research specific to your geography and the return driver in question, various carbon, environmental or social impact assessments, offtake agreements with a buyer either for wood, agricultural or carbon products, documented discussions on insurances, etc.
Set-up your Nature-Based Solutions Project Marketing Exploration Call
If you have a solid investable NBS opportunity and are looking for ways to improve your marketing material to capture the interest of investors, I am offering a 2-hour exploration call, to bring clarity to your NBS proposition. I can help you save time and money, so that you can build a clear investment case, and be ready to enter discussions with investors.
If you would like to learn more about this offering, please write to me and I will send you the information.