Igniting the Next Wave of Infrastructure Development

Spring Lane Capital’s Christian Zabbal on financing decentralised infrastructure

The late, world-renowned physicist Stephen Hawking made headlines recently when he declared that overpopulation and energy consumption would turn the earth into a “ball of fire” by 2600.
It’s not only the world’s increasing population that is placing extraordinary demands on our planet’s resources, on the systems we use to manage them and on the infrastructure necessary to support human activity, it’s the increasing wealth and demands of that population, and the impact is already significant – there is no need to wait until 2600.
If this fate is to be avoided, the world needs to create sustainable ways to fulfill those demands – sustainable energy, water, food and waste reuse, for example – which is why these have become some of the fastest growing markets in the world. In fact, with strong fundamentals (such as declining cost curves) and given the pressures of these macro trends, the world should be awash in projects deploying clean water, energy and food solutions. But while the number of such projects has grown significantly in the last few years, it is still well below what it should be in light of the demand. Financial markets in general have found it difficult to fund these types of projects at the kind of scale that the world both needs and wants. But why?

The new distributed infrastructure projects are difficult to diligence and even more difficult to structure for traditional financial players

Historically, the infrastructure systems necessary to meet market needs have been large, centralised and bespoke, such as a large incinerator trucking in waste from multiple states; a giant coal power plant; or a $1bn municipal water treatment facility. But advancements in technology, lower cost structures, increased consumer demand and policy and regulatory incentives have resulted in a new model emerging: increasingly, the production of consumable resources like energy, food and water, and the removal and treatment of waste created by their production and use — is moving away from traditional centralised facilities to smaller, more cost effective and less wasteful distributed assets such as solar arrays and urban greenhouses. The new economy demands distributed facilities like these that are flexible, easier to permit and closer to their end users.
The world of finance, however, has not yet caught up with this decentralising trend. Financing a large, centralised facility is relatively common: players know what to expect and there is a well-developed playbook for raising capital — from debt to equity — for these types of projects. But smaller, decentralised projects are far more challenging. For example, how do you examine and efficiently diligence a hundred inter-connected solar arrays on hundreds of different rooftops or a dozen distributed water filtration systems, instead of one big central facility?The new distributed infrastructure projects are difficult to diligence and even more difficult to structure for traditional financial players such as banks and insurance companies. As a result, companies with great business models and very attractive economics have a tough time getting the financing needed to grow.
Institutional investors are especially ill-equipped to take advantage of this market opportunity. Despite what appears to be a natural fit – with the demands on institutional investors to take the long view and the enormous long-term potential of the sustainability and infrastructure markets — there are simply not enough large-scale sustainability and green energy projects available with the appropriate risk/reward profile and at the investment size institutional investors require.
While some financing of these projects is happening, it is being accomplished on an ad hoc basis, with one-off solutions being achieved through pure equity financing rounds, credit or equity investments from family offices and high net worth individuals, or with support from the customers. This system is extremely inefficient and completely inadequate to meet either the market need or the opportunity.
Fortunately, there is a solution to this dilemma – a bridge to help both pool and scale projects to meet the needs of institutional investors and provide much sought after capital for the next wave of sustainability and infrastructure development. By providing initial stage financing, intermediaries are launching projects and building assets, allowing them to grow large enough for second stage funding. Then, these projects can be packaged into a larger investment that meets the needs of institutional investors. The resulting transaction is a traditional project finance deal that is both recognisable to Wall Street and scalable, with predictable yields.
Firms like Generate Capital, a clean energy financing company, and MNL Partners, a developer of joint venture-like partnerships between US technology providers and Chinese corporates, are perfect examples, bridging the divide by providing intermediate stage capital where the risk profile and scale of capital required for commercial deployment of certain technologies has rendered projects uneconomic in the past.
With innovative, new investment models like these, we are poised to bring large scale financing to a market that has not been able to access it until now, which may just set the world on fire.

Christian Zabbal is a Managing Partner at Spring Lane Capital