FAQs from Asset Owners

Below are answers to frequently asked questions about

• IGF-related innovative structures — differences and similarities between the current pooled FUNDS and “BESPOKE” (single company) participation. 
• What is a guarantee fund and how is it different from an equity fund?
• Impact project selection, geographic focus and currency risk, and measures
• Minimums versus average commitment amounts
• How we are different than our competition
• Risk analysis (details provided via separate FAQ) plus we mean by your “securitized” position
• Target risk adjusted returns, and
• Steps toward participation. 

These points apply to short-term “completion assurance” guarantees bespoke to specific projects as well as to pooled debt and guarantee fund participation.  Click on the question below to jump to the answer. If you notice a question you happen to have that is not included here, please let us know.

1. Can lenders or guarantors select which companies to support?
2. Differences and similarities between the current pooled FUNDS and “BESPOKE” (single company) participation. 
3. What is a guarantee fund and how is it different from an equity fund?
4. Impact project selection, geographic focus and currency risk, and measures
5. Minimums versus average commitment amounts
6. How we are different than our competition?
7. Risk analysis and what do we mean by your “securitized” position?
8. Target returns: navigating available upside at reasonable risk
9. What steps do I take toward participation?

Have a question that isn’t addressed here? Review Risk-related FAQs and other website articles, then if your question remains unanswered, ask us!

1. Can lenders or guarantors select which companies to support?

Answer: Yes, guarantors or lenders can select specific companies, or exclude certain ones.  We call that “bespoke.”  Fund participation is different, in that you will be investing in or providing a guarantee for the entire portfolio of a fund. Diversification across multiple companies reduces single-company failure risk.

1. 2. Differences and similarities between the current pooled FUNDS and “BESPOKE” (single company) participation

Answer: In3’s innovative funding structure requires some form of Security for In3’s private Family Office to access its own resources per banking requirements. Each IGF guarantee fund uses different types of assets, whether cash or hypothecated non-cash assets, used as “completion assurance” guarantees (definition) in support of fully vetted and insured mid-market “impact” project financing from In3’s Family Office capital partner.

In addition, IGF’s General Partners operate a Debt Fund, not a guarantee at all, used as high-interest bridge capital, often necessary as part of the continuum of funding to realize project goals.  For example, with time-sensitive incentives such as expiring Tax Credits, bridge capital can make a significant difference.

Thus, there are five options in total:

• • Select “bespoke” companies – you decide which project(s) to support.
  • Debt fund – investors do not select; you invest in the entire portfolio. Diversification reduces single-company default risk.
  • Guarantee Fund I, cash surety
  • Guarantee Fund II, non-cash assets
  • Guarantee Fund III, donor-advised

Each option has different terms (such as minimums), risks and anticipated returns.  To expand on this, see Question 8, below “Target returns: navigating available upside at reasonable risk,” or Question 6, “How we are different than our competition?” Otherwise, get started.

3. What is a guarantee fund and how is it different from an equity fund?

Answer: A guarantee fund pools cash or non-cash assets to offset partial non-completion risk with clients (project developers) that are funding mid-market impact projects.  Funding originates from a private, we say “in-house,” US-based single family office.  Each fund pools assets as described in the fund’s respective Regulation D, Rule 506c syndication offering memorandum.

Compared to an equity fund, the guarantee funds offer a much lower risk profile, but also less financial upside, on average, as equity generally accepts more risk than debt or debt pools.

Is the private project funding itself “guaranteed”? Yes, once we reach financial closing, the funding is effectively locked down per a schedule of pre-approved monthly drawdowns. These transfers are automatic (scheduled) by the funding bank for the full allocation of funding. An Investment Agreement will be negotiated and signed to govern the proscribed draw schedule and all obligations on behalf of both parties.  These monthly transfers cannot be interrupted or stopped except on the rare occasion of project developer uncured breach of contract, providing a moment to re-evaluate project ownership in terms of the cause of the breach, which is where guarantor or pooled fund would receive the right to exercise restructuring of ownership, restoration of confidence that the project can be completed, or repurposing of the guarantee, among other remedies.

By contrast, equity funds would experience such contractual defaults as a loss, following liquidation of remaining assets, if any, dragging down the PE fund’s overall performance.

4. Impact project selection, geographic focus and currency risk, and measures

Answer: In3 Capital’s project selection is a rigorous vetting and auditing process based on nearly 3 decades of experience in this space.  We are also “opportunistic” in the sense that some projects reflect lengthy pipelines of related projects, sometimes using “cloned” engineering that make expansion to additional sites quite straightforward.

We have global reach, aside from the countries with sanctions by the US State Department.  Our JV equity partnership with clients can invest in any major currency, where we take the hedging risk.  In addition to strong financial fundamentals, projects are specifically selected for their social and/or environmental benefits.  This spans both well-established methods of decreasing carbon emissions (de-carbonizing transportation and the other top sources) as well as capture and nature-based sequestrations, such as through soils, living things like trees or bamboo, ecosystem services, habitat preservation or restoration, and other well-proven pathways.

The different for In3 CAP-funded projects is that, with reasonably low commercial risk, we can also finance first-of-a-kind solutions to climate, affordable housing, etc., where the structure itself favors such innovations as they often outperform the incumbents.

We measure per The GIIN and other established Impact Investment best practices both the social side, which in the developing world often includes improving local self-reliance, among other important outcomes, alongside the environmental advantages and financial fundamentals.  Innovative projects — especially those that harness displaced resources, formerly known as waste, from municipal to end-of-life tires — often deliver above-average IRRs that more commoditized solutions (such as solar and wind-power projects) cannot achieve.

5. Minimums versus average commitment amounts

Answer: The minimum cash is less than non-cash as the involved banks have their own minimums for the latter.  Generally, a $10 million minimum would apply to either a bespoke guarantee or fund participation, where the average for each has been roughly 3x that for bespoke non-cash assets ($30m) and 2x (just under US$20 million) for the respective guarantee fund.  The first transaction requires evidence of the collateral that our bank would accept, using a simple verification step, or creditworthy status on a bank-to-bank basis.

The same mechanism applies to an Avalized Promissory Note (AvPN) issued by the project company or sponsor — the instrument remains in effect (“operative”) until COD, and then expires and falls away.

Cash is more flexible.  Minimum is presently $3 million; smaller amounts per lender can be soft circled ahead of a call that precedes financial closings.

The governing terms and conditions for the use of the completion assurance guarantee are defined in an Investment Agreement that will prepared and signed, and available for inspection, before the BG/SbLC or AvPN hardcopy, or cash surety is sent. It would be unethical and improper to ask for the guarantee instrument ahead of mutually agreed-upon funding contracts. Only once all parties negotiate/agree and sign the funding agreement, which is what constitutes financial closing, would the guarantee be received by one of our partner’s banks in order to begin drawing down the project’s funds, with first draw within 45 days following financial closing.

6. How we are different than our competition?

Answer: First, these instruments are transferable, as required by the Uniform Rules for Demand Guarantees (ICC publication 758), so that it can be sent from the issuing bank to the investor/lender’s bank. The BG/SbLC or AvPN would not be transferred away to anyone else because then In3’s partners would no longer have it. Simple.

A bit more complex is what could cause the instrument to be called? Short answer: the instrument is callable (and if it was not callable, it would not constitute a proper financial guarantee), but it would only be called in the event of uncured breach of contract. If the Developer upholds the covenants, terms and conditions (T’s & C’s) of the Investment Agreement, there will be no issue. The overarching purpose is to provide security that assures or ensures completion of the project’s assets. You will be invited to review and consent to a full disclosure of all these T’s & C’s before anyone is asked to issue the actual guarantee instrument.

In practice, problems that arise during the draw period are always worked out in a cooperative manner so that the BG/SbLC remains in force (an “operative instrument,”) and so that nobody calls the guarantee, or calls off the project(s). To do so, after all the arrangements have been made, would be paramount to a disaster, where — by contrast, the true intent of all this — the upside benefit of completing and operating the project, organized to generate long-term cashflows and often social/environment value, is incomparable.

To call a completion assurance guarantee would be an absolute last resort, and would be reserved for situations where there is no solution (no “fix” or cure available) to deal with fraud, malfeasance, or other “incurable” non-compliance with the T’s & C’s of the project developer/owner’s funding agreement. Basically, if they ran off with the money and left no forwarding address. In practice, this cannot happen because the monthly draws are monitored, so at most a single month’s funding could be at issue, where even that has not happened even once in all our history. Working together in an open and cooperative manner ensures that new project construction and commissioning will stay on track to reach Commercial Operation Date (COD).

Note that for any “third party” guarantors arranged by In3, the guarantor is in a securitized position with step-in rights in the extremely unlikely event that the developer opts out and abandons their own project and its assets. The guarantor would, in that case, be entitled to increase their compensation in the restructuring ownership due to developer default.

In a way, with this approach to funding projects, the objective becomes making sure the Developer and, in turn, the contractors or subcontractors, do not their breach their respective agreements. It is an incentive to work together to resolve whatever issues crop up. Note that it is also common for the EPC/general contractor to carry insurance in the form of a performance/completion bonds, another layer of protection for the developer, even though the capital (funding bank) cannot accept insurance in lieu of a financial guarantee.

Preview: Question 7 translates all this into practice, then explains what constitutes an uncured breach that could result in a claim against the guarantee.

7. Risk analysis and what do we mean by your “securitized” position?

Answer: Uncured breach of contract (investment agreement) by the developer. The proposed investment agreement will be arranged by the fund or client’s legal counsel in cooperation with Family Office’s legal counsel, following our due diligence, which will spell this out in the proper context. WE DO NOT EXPECT A COMMITMENT FROM ANY BESPOKE GUARANTOR UNTIL THIS CONTRACT HAS BEEN PROPERLY REVIEWED AND ENTERED.

It is important to understand the business context and rationale for why we would never call an issued BG/SbLC or AvPN, and never have. In fact, calling/cashing/drawing on an issued instrument must be avoided. We can’t call it except when there is an iron-clad case of fraud, as the courts would need to decide, as they have been quite consistent over the long history of these rules, URDG ICC 758. Making any claim would be a strong negative reflection on all parties, including In3. In practice, we would not call it, as we simply would not need to; the parties must work together to complete the project (or a similar project, or at a different site …) no matter what.

Our funding partner becomes the developer of record and a shareholder in the project, so the last thing they want would be (a) to disrupt the success of the project by not releasing a guarantee, or (b) to jeopardize banking relationships based on a 40-year track record of doing projects in this way just because one project needs a little more time or money to get on its feet.

What constitutes an “incurable” breach? Essentially, it comes down to four areas, namely

(1) Gross Default (the developer closes shop, leaves town, leaves no forwarding address …),

(2) Gross misrepresentation and fraud (the warranty section of the Investment Agreement defines this in greater detail),

(3) Misuse or misappropriation of funds, where the documented Uses of Proceeds defines the correct and proper allocations, or

(4) If the instrument expires (bank guarantees or AvPNs are issued with an expiration or maturity date) before the project assets are completed and commissioned. This last one is easily fixed/prevented: renew the BG/SbLC or AvPN as needed until COD.

To be clear, the BG/SbLC, SG or AvPN must not be called – that’s an outcome we must make sure we all avoid, as (worth emphasis) it would reflect negatively on all of us, including the Family Office, In3, and the developer/sponsor(s) in the eyes of our respective banks. In other words, breach of contract by the developer is a worst case scenario that applies only if the project investment agreement’s T’s & C’s are violated, following a substantial cure period, which is akin to a complete breakdown of good will and cooperation, where we would have no choice but to call the instrument (fraud/theft) to make up for a material loss, effectively putting the case into the court system. The burden of proof would be on the family office to show there was uncured material breach. The Uniform Rules for Demand Guarantees (URDG ICC 758) are well-proven as reported by independent legal counsel Reed Smith; see URDG 758 – A facelift for the Demand Guarantee Rules.

The point is that the guarantee will not be called arbitrarily or at all — that would be both illegal and a waste of time. In fact, it is quite difficult to prove incurable breach of contract such that a legitimate claim could be made under URDG 758. Thus, such completion assurance guarantees serve as surety that the parties will work through any issues. More on these “demand guarantee” technicalities.

Lastly, note an important subtlety: a BG/SbLC or AvPN could only be called/cashed/drawn up to the extent of funds transferred at that point. If the instrument has just been issued, for example, but no loan/investment funds have yet to be transferred against it, the instrument effectively has no monetary value at that point, and thus it makes no sense for it to be called. There is, in effect, no demand guarantee operating until funds are transferred against it. And if no funds are transferred, and the entire funding arrangement were to be canceled, the BG/SbLC or Promissory Note can be taken back or “unwound” without material consequence.

We cannot imagine a reason why anyone would want to do this, having come all that way, ignoring the upside business value of completing an operating project, but we have found this explanation is sometimes key to understanding the fundamental tenants of the proposed business arrangement.

Does this logic help you appreciated how this model is actually quite low-risk and safe for all parties? See also, Why CAP [formerly CGP] and How It Works “explainer video” if you wish to have a visual depiction. We are striving to show how everyone who uses this approach with basic honesty, and non-fraudulent intentions, will be protected. We know from experience that this model is reasonably low risk, and our track record shows it does work out well for all parties.

8. Target returns: navigating available upside at reasonable risk

Answer: Depending on available assets, usually the right answer is an asset-backed Standby Letter of Credit or SbLC, shown at the center of the comparison chart below.

With sufficient creditworthiness, our bank may accept your balance sheet without the need for a specific asset pledged as collateral. But in addition to arranging for our bank’s guarantee using an SbLC sent via customary Brussels SWIFT, we can also accept, on behalf of client projects the guarantor would want to support, either hypothecated securities (public equities, MTNs, ISIN-registered and rated bonds, or gold with SKR) or in some cases available assets or credit can be converted to cash as a short-term deposit as doing so is significantly more leveraged than the other two approaches.

Comparison of the available pathways below:

9. What steps do I take toward participation?

Answer: In3’s family office funding partner has long-established relationships with banks where we have built up lines of commercial credit — sometimes called a “credit facility” — that will be leveraged, alongside cash holdings as equity carried interest. The amount of equity depends on several factors, but mainly relies on the value of the Completion Assurance Guarantee (CAG) relative to the total funding request, and project profitability (measured as unlevered IRR), which varies by industry.

The funder established these credit facilities to build their own large-scale projects, so to make this capital available to In3 client projects, the bank relationship managers expect us to offset at least some of the risk of non-completion using a CAG or cash deposit. In other words, the funder is the developer of record in the eyes of their bank.

Still have questions? We’ve got more answers, no doubt. All In3 Capital Group FAQs

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