The Brief: Catalytic warehousing for climate investing

Greetings Agents of Impact!

In today’s Brief:

• Catalytic warehousing for climate investing
• Deep sea desalination
• Financing climate hardware
• Private investors warm to Africa’s most underserved markets 

Featured: Catalytic Capital

How ‘catalytic warehousing’ can help stand up emerging fund managers and accelerate climate investing. Large, incumbent fund managers are necessary but not sufficient. Emerging, if unproven, fund managers in underdeveloped markets will be essential for identifying innovative strategies, supporting local businesses and creating an investment pipeline to scale up financing for climate action and the Sustainable Development Goals. Such first-time, or even second- and third-time fund managers, however, face headwinds raising capital. Institutional investors, including development finance institutions, often exclude emerging managers based on their lack of a track record, unproven team or small size. Enabling new managers to gain traction and credibility, by making investments and “warehousing” them before their funds have closed “could have an outsized impact toward closing the investment gap, because it would help to establish more SDG-focused investment intermediaries and attract larger sums of capital,” a half-dozen fund managers argue in a guest post and call to action on ImpactAlpha. 

• Priming the capital pump. In a warehouse structure, a private investment is made and held temporarily, with the intention of later transferring it to an investment fund. Outside of the impact-investing world, emerging fund managers have long used a strategy of making pre-fund investments through “warehouse” structures to gain traction and credibility. The authors – Clarmondial AG’s Tanja Havemann, Encourage Capital’s Adam Wolfensohn, Developing World Markets’ Edward Marshall, Total Impact Capital’s John Simon, Blue Haven Initiative’s Daniel Wanjira and Suzanne Bagert of Suzanne Bagert Law propose the creation of a shared facility to “prime the impact-capital pump, foster early traction for such fund managers, and drive more capital to advance solutions for the SDGs.” 

• Stand-alone investments. The proposed “SDG Warehousing Facility” would require an individual or consortium of catalytic investors to commit capital to the strategy, and a team of professionals to analyze emerging fund managers, decide who to back, support them, and possibly be prepared to take over any stranded assets. “The goal would be to catalyze initial stand-alone investments into the formation of a larger fund,” the authors say. Ownership of the investments could be held through special purpose vehicles, keeping the warehoused assets distinct from other assets. “Catalytic capital has the potential to use the warehouse model to accelerate the traction and credibility of emerging managers and products that seek to address the SDGs.” 

• Pilot facilities. As ImpactAlpha has reported, warehousing is becoming an important tool in the impact investing toolkit. In September, Mission Driven Finance launched its Capital Partners unit with $4.4 million to help emerging managers cover business operation costs. The facility offers deal warehousing, bridge financing, working capital advances, and capital for co-investments. The Collaborative for Frontier Finance is designing a warehousing facility, LAUNCH+ Capital, for emerging fund managers in Africa. CFF, with support from the Lemelson Foundation and the UK’s Foreign, Commonwealth and Development Office, is looking to raise several million dollars in grants and low-cost catalytic capital to support up to 15 fund managers with a warehousing line of credit, as well as shared legal services and credit for setup costs and operational expenses.
  
• Keep reading, “How ‘catalytic warehousing’ can help stand up emerging fund managers and accelerate climate investing,” by Tanja Havemann, Adam Wolfensohn, Edward Marshall, John Simon, Daniel Wanjira and Suzanne Bagert. The Catalytic Capital Consortium supports ImpactAlpha’s Catalytic Capital coverage.

Dealflow: Water Tech

OceanWell snags $11 million to produce fresh water from deep sea ‘farms.’ Freshwater sources are dwindling as demand from agriculture and urban growth outstrip nature’s ability to replenish. OceanWell, based in Menlo Park, Calif., has developed a modular desalination system that can be planted more than a thousand feet underwater to harness the ocean’s gravitational pressure for on-demand freshwater. The reverse osmosis process filters out salt, bacteria, pesticides, PFAS and other harmful contaminants to make the water suitable for drinking. OceanWell’s Series A funding will go towards setting up its first sea-based “water farm” with the Las Virgenes Municipal Water District, a utility in Calabasas, Calif., where more frequent droughts have exacerbated freshwater shortages. Each of the water tech company’s modular pods are expected to supply up to one million gallons of freshwater daily. “Our goal is to provide utility-scale, reliable and sustainable freshwater solutions that can supply clean drinking water to communities around the globe,” said OceanWell’s Robert Bergstrom. 

• Energy efficient. Most desalination methods are energy intensive and produce brine waste that is harmful to marine life and coastal ecosystems. By using the ocean’s natural gravitational force, OceanWell lowers energy consumption by up to 40%. The process does not rely on chemicals that generate harmful brine. OceanWell’s goal is to build 15 freshwater farms globally over a decade. Investors in the new round include Japanese manufacturing and water infrastructure firm Kubota Corp., former Goldman Sachs executive Charles McGarraugh, and the family office of Jon Hemingway.
  
• More. 

Tangible raises £4 million to help climate tech companies scale with debt financing. A key challenge for hardware-focused climate tech startups is shifting from early design and development of their technology to pilot plants, first-of-a-kind facilities and customer deployments. Venture capital is readily available to fund the former, but commercialization requires a different set of investors to provide debt financing. London-based Tangible is developing financial services to help climate tech companies make that leap. Its platform will connect climate tech companies with lenders and operators, structure debt deals, and manage the financing process. Tangible has raised £4 million ($5 million) in equity and grant funding from a group of European and UK-based venture firms, including Future Positive Capital, Systemiq Capital, Hardware Club VC, MMC and Blackwood. “The climate tech exists – what’s missing is the financial infrastructure to scale it,” Tangible said, announcing the deal and a related rebrand. 

• Hard assets. Tangible is among the companies modeling solutions to tackle climate finance’s “missing middle.” Such funding typically doesn’t meet the risk and return parameters of venture capital, but is too novel and risky for infrastructure finance, and too capital-intensive for growth-stage private equity. In June, Elemental Impact debuted its “D-SAFE,” a twist on Silicon Valley’s “simple agreement for equity,” a debt instrument that can convert to equity (see, “How D-SAFES can help climate tech startups get projects off the ground”). “Hard assets are critical to net zero. Our role is to grow the balance sheet dedicated to supporting them,” said Tangible’s William Godfrey.
  
• More.

Dealflow overflow. Investment news crossing our desks:

• General Atlantic invested in Pennsylvania-based rubber recycling and manufacturing company Ecore International via its BeyondNetZero fund. (Recycling Today)
  
• Climate Investment Funds’ Capital Markets Mechanism listed its bond issuance program on the London Stock Exchange to mobilize climate finance for projects in emerging markets. (CIF)
  
• Malaysia-based Secai Marche added $1.6 million to its Series A equity round to connect farmers in Southeast Asia with restaurants and retailers. (e27)
  
• Netherlands-based Tract raised $11.2 million from food giants including Archer Daniels Midlands and Cargill, and Omidyar Group’s Working Capital Fund, to help food companies manage sustainability risks in their supply chains (see related, “Here’s a regulation that business leaders support: Scrubbing supply chains of deforestation”). (Tract)

Signals: Impact in Africa

Private investors warm to small business investments in Africa’s most underserved markets. The lion’s share of private capital in Africa goes to just a handful of countries. XSML has spent 15 years pushing more private investors into a broader set of markets. The Netherlands-based fund manager takes small equity shares and provides mezzanine and debt financing to small and medium-sized businesses in Angola, Zambia, Uganda and the Democratic Republic of the Congo. Over four funds, more than 70 deals and $145 million in deployed capital, XSML has seen more impact and commercial investors join development finance institutions to invest in such countries. “There’s more impact money, a bit more private capital, and a bit more local money,” XSML’s Barthout van Slingelandt tells ImpactAlpha.

• Tapping local capital. Nearly half of private credit and equity invested in Africa last year – some $5 billion – went into just one market: South Africa. Kenya, Morocco, Egypt, Nigeria and, notably, Cote d’Ivoire, shared 35%. Fund managers and ecosystem players in Africa’s other 48 markets are stepping up efforts to mobilize capital from African institutional investors, which collectively manage more than $2 trillion in assets. In August, Angolan small business fund manager Kimbo Fund raised $5 million from the Angola Sovereign Wealth Fund. The National Advisory Boards for Impact Investing in Ghana and Zambia have set up funding mechanisms to raise capital from local pension funds and insurance companies.
  
• Regular rewards. XSML focuses on businesses with strong job and revenue growth potential in manufacturing, healthcare, financial services and other core economic sectors. With close to $100 million in its fourth fund, the firm sees new opportunities in recycling, waste management and climate-related industries. To help investors get comfortable with its markets, XSML disburses its proceeds on a monthly basis. “If they see those returns increasing fund over fund, it becomes a model people start to trust,” says van Slingelandt.
  
• Keep reading, “Private investors warm to small business investments in Africa’s most underserved markets,” by Lucy Ngige on ImpactAlpha. 

Agents of Impact: Follow the Talent

Workforce and Organizational Research Center taps Amy Kalokerinos, formerly with Andreessen Horowitz, as interim COO… Allevate Impact Capital welcomes Kaley Palanjian as an MBA intern… Social Finance adds humanservices.ai’s Stephen Rockwell as an advisor… Pursuit is hiring a strategic investments manager in New York (see, “How Pursuit is upskilling low-income New Yorkers for high-paying coding jobs”).

Silicon Valley Social Venture Fund seeks an impact investing director in the San Francisco Bay Area… JPMorgan Chase & Co. has an opening for an impact finance manager… Bank of America is looking for a global strategic and sustainable investments analyst… The National Association for Latino Community Asset Builders will host a webinar today at 12pm ET on how local solar energy developers and lenders can access capital from the US Department of Energy’s Community Power Accelerator. 

Climate United launched NEXT, a pre-development grant program to help nonprofits, state and local governments, Indian tribes, and schools accelerate early-stage clean energy projects. The group will hold a webinar for applicants Friday, Dec. 6.  

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

– Nov. 20, 2024