Project financing is a common strategy in many industries — particularly real estate, public works, construction and mining.
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Fashion for Good, which, true to its name, works to make fashion better for people and planet, tapped the Boston-based private equity firm for a report focused on how project financing may help close funding gaps in the commercialization stage of development for textiles startups looking to help green a sector often associated with polluting rather than protecting the Earth.
Katrin Ley, managing director for Fashion for Good, which counts Polybion, Kintra Fibers and Rubi Laboratories in its innovation portfolio, said the report aims to educate industry stakeholders on the complex, hard-to-grasp topic of project financing and what it could mean for their emerging businesses.
“We hope to enhance innovators’ understanding of what is required from them, as well as who the relevant stakeholders are (i.e. brands, supply chain partners and financiers), in order to ultimately assist in further enabling the scaling of much-needed innovation,” she told Sourcing Journal. “Moreover, we hope to stimulate conversations between all of these parties, so that respective challenges and opportunities which exist can be addressed and taken advantage of.”
Companies use project financing to secure funding for a specific project, and leverage that project’s assets such as equipment, machinery and raw materials against the investment as collateral. The process requires higher levels of due diligence than many other types of investment.
Jordan Kasarjian, an associate at Spring Lane Capital, said that’s due to lower certainty around a recipient’s creditworthiness.
“Project financing is unique in that you create a completely isolated and separate entity whose creditworthiness and relative cost of capital is based off of the assets within that entity. The relative cost of capital is isolated and the amount of capital is isolated to that unique opportunity. There’s great opportunity for a smaller corporation who might not have access to large amounts of capital — or a low cost of capital — to be able to leverage that in a really well-structured project.”
While project financing could offer benefits to larger companies and corporations, those types of organizations may be better off with more traditional financing models, Kasarjian said. That’s because more traditional models, like raising corporate debt, often end up coming in at a lower price tag.
Project financing can also help startups retain stronger ownership of the organization at large. Venture capital can be dilutive to startups, but since project-based financing mandates the assets of a singular project as collateral, small companies typically don’t lose any of their equity with this type of investment, according to the joint report.
But by the time project financing becomes an option, some startups may have already given equity away. Per the report, project financing only becomes viable once innovators can prove a demonstration phase, which means the project is already on the cusp of commercialization.
As part of the collaboration between Spring Lane and Amsterdam’s Fashion for Good, Spring Lane is looking to make investments in sustainable textiles projects. The firm has experience with project financing in the food, waste, energy and transportation industries. It has not yet made an investment in a fashion company, but Kasarjian said the firm has begun evaluating prospects for its first investment in the space.
Kasarjian said project financing investments run the gambit in terms of size.
“You can structure project finance transactions for projects that are as small as a few million dollars,” he said, adding $3 to $5 million “are some of the smallest I’ve seen across a number of industries.”
“Of course, you have [other] project finance transactions that are hundreds of times that size — $3 to $5 billion dollars in funding… so there’s just such a wide range,” he added.
Per Kasarjian, Spring Lane won’t be following either extreme with its project financing investments in the textiles industry. Instead, he said, the firm aims to bridge the gap between smaller funding typical of venture capital and growth equity firms and major investments from institutional investors, like J.P. Morgan and Macquarie Group.
Due to current economic conditions, Kasarjian said, now could be the perfect time for innovators and entrepreneurs to reconsider their future funding options.
“We’ve gone from one of the longest bull runs in market history to an economic downturn. And to that, a lot of the innovations in textile tech are reaching an inflection point in their maturity in that it’s time to move out of pilot and demonstration facilities and move into full-scale commercial deployment. I think the confluence of those two points should encourage folks to consider alternative forms of financing,” he said.
But securing an investment could prove difficult for startups and small corporations that didn’t have project financing in mind from the jump, Frans Jooste, an investment manager for Fashion for Good, told Sourcing Journal.
“Construction of project-based financing can take [over three] years to put together, which is not only a timeframe often outside the scope in which startups operate, but a period in which those innovators will grow and change significantly,” Jooste said. “Therefore, understanding what will be required in the future and preparing for those moments well ahead of time will be key. … Innovators will have to start planning from the start if they want to be in a position of presenting a structured project to financiers when the time comes to scale.”
Jooste explained that the planning required to successfully obtain a project financing investment will likely benefit small companies in the long run — the stringent process and requirements leading up to an investment increase the chances of success for projects that do receive funding.
Jooste and Kasarjian agreed that project financing is not nearly as popular as debt-based financing in the textile industry today. Project financing requires startups to have a number of different evaluation stages, contracts and documents in place.
To help innovators increase their chances of securing project financing, the report includes a section that details key components of documents critical to the project financing process, like offtake contracts, feedstock supply agreements and engineering, procurement, and construction (EPC) contracts.