The role of Concessional capital to unlock Private Financing for Nature projects in the Global South
The USAID recently came forward with a fascinating report- "Amazon Private Sector Landscape: Unlocking Capital for a Standing-Forest Economy" documenting critical insights through engaging with several capital providers and project developers active in the Amazonian biome in Brazil. The study though limited in its geographical scope, does a fabulous job in elucidating the barriers and gaps faced by investors across varying project types within the Nature-based Solutions (NbS) ecosystem.
1. Categories of NbS projects seeking Institutional Capital
As referenced in the figure above, the USAID study focusses on the most significant and widespread component within the broader NbS ecosystem, referred to here as Bioresources, constituting the following project types:
One could further club the latter two (not without losing certain nuances) to broadly refer to sustainable forestry and agriculture projects, while the first bucket almost exclusively includes projects designed for carbon markets (and now increasingly biodiversity markets).
As suggested in the above table, the first bucket of projects predominantly derive their revenues through sale of carbon credits (and biodiversity credits), while the other two have a commercial top line derived from sale of sustainably harvested primary (timber, crops) and secondary (processed/value-added consumer goods) products.
2. Structural Gaps in the existing Capital Stack to fund early stage NbS projects
Tapping into the growing interest in the asset class, a number of asset managers have raised Limited Partner (LP) capital to back their individual thesis, grounded in the team's past exposure to the market opportunity and their understanding of the emerging risk-return profile. Mapping the funds across instruments and ticket-sizes, following structural gaps emerge in the study:
2.a. Limited capital availability at sub-US $1M ticket size
Both debt and equity capital is scarcely available for investments under $1M. This makes sense particularly in case of equity capital, since smaller projects as well as small and medium sized project developers/enterprises (those seeking <$1M) are structurally risky, particularly in the NbS ecosystem.
Similarly, the concessional capital is being increasingly diverted away towards collateralised instruments, away from financing smaller groups or cooperatives.
2.b. Thinly served equity and flexible debt tickets between US $5M and US $10M
The mapping reveals a significant lower presence of investors serving the $5M-$10M bracket.
In case of equity investments, the emerging NbS focussed impact funds and foundations, which predominantly lead the smaller ticket investments, typically are found to invest less than $5M per deal, but more than $1M due to their operating constraints.
On the other end of the spectrum, the larger impact funds and international funds invest a min of $10M in deals with future potential to scale, to be able to justify their transaction and opportunity costs.
In case of debt, though there exists greater supply than equity at this scale, lack of flexible terms such as lower grace periods, sculpted principal amortisation schedules and revenue-based payments limits its use for land and resource intensive projects.
2.c. Lack of fit-for-purpose guarantees for initial plantations
Large scale forestry projects, in particular, tend to have sizeable upfront capital expenditure requirements in the initial phases, but availability of limited collateral restricts their ability to access debt. Issues with land titles further limit the use of land as collateral. Off-take agreements are typically unable to underwrite the risks inherent in the projects at this stage.
Contrast this with energy projects, which benefit from both debt and off-take financing, to be able to access the necessary capital at this stage.
The NbS projects thus require alternative guarantee instruments to fill the gap in the capital stack to ride them over the initial phase.
3. Barriers in early stage Capital Deployment owing to Limitations of Investment Vehicles
Following are the critical barriers faced by the existing capital providers, restricting their ability to support early stage financing, as highlighted from engaging with the participating capital providers, as well as capital seekers and other ecosystem participants in the study.
Restricting our focus on carbon focussed NbS projects, following are the key investment barriers faced by the asset managers, as reflected in the table above:
3.a. Complexities in Land Ownership
Almost all the investors, ranging from asset managers to Multilateral Climate Funds (MCFs) echoed the problems around land ownership being a critical risk to investing in an NbS project. This is true even if the area is privately owned (which most often is a preference for most asset managers), as conducting due-diligence is often complex and costly, stemming from the fact that local laws are regional in nature and require specific and nuanced know-how to completely understand the risk in the underlying project being evaluated.
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Particularly in case of carbon projects, uncertainties around land ownership raise concerns about the permanence and legitimacy of the project, undermining investor confidence.
3.b. Reputational risks
The investors, particularly in context of the carbon projects within the voluntary carbon markets, must manage the project credibility risk. Ensuring the integrity and verifiability of the carbon and biodiversity credits is essential to maintaining investor trust and avoiding reputational damage.
3.c. Inability to raise risk-aligned, patient LP capital
The idiosyncratic nature of the NbS projects, particularly those focus on carbon sequestration, command long gestation periods for returns to be fully realised.
This makes fund raising a challenge for asset managers. Fund of Funds/LPs, especially those investing in private equity or debt, typically invest in closed-ended funds with lifespans of 10-12 years, with investment periods typically ranging from 5-6 years.
The relatively new nature of the NbS asset class further exacerbates the risk perception for LPs and discourage investment.
3.d. Unavailability to de-risking mechanisms
Investors have consistently identified guarantees as critical instruments that could help de-risk projects and portfolio, thereby unlocking private capital for NbS projects. However, as discussed earlier, unlike more established sectors such as renewable energy, NbS projects typically at the early stage lack the collateral, the required track record, and standardized data needed to qualify for traditional project finance and risk management approaches.
Even the development focussed capital providers require substantial collateral to underwrite loans, restricting access to finance for a handful of relatively more sophisticated setups.
A further nuance uncovered is that though the underlying land could be considered an asset in these NbS projects, due to its minimal contribution to the overall capital expenditure, it is an insufficient collateral for large scale project financing. The existing de-risking mechanisms are generally not designed to support the project types being discussed, for instance, only supporting transactions with ticket-sized upwards of $50M with guarantees, which currently are far and few in between.
4. Opportunities for Donor Engagement to Catalyse Investments for Nature Positive Projects
The barriers identified thus far hinder the development of a standing forest and NbS ecosystem in most investible areas within the Global South. These however present an opportunity set for the non-returnable capital providers i.e. the donor community to achieve a significant leverage in their outcome, through investing in the following mechanisms:
4.a. Develop de-risking mechanisms for smaller transactions
A lack of guarantees and insurance products is a significant barrier to scaling investments across all segments, as cited by providers of concessional capital. Guarantee mechanisms tailored to transactions between US$1M and US$10M – the range with the largest offering gap – could unlock debt and equity capital for projects in the region.
4.b. Provide catalytic support for capital mobilisation
Donors play a critical role in enabling innovative financing structures that align risk and return expectations across various investor types.The USAID-supported ABF has been repeatedly cited by investors as a transformative vehicle, mobilizing capital for sustainable businesses in the Amazon region.
Building on ABF’s success, several opportunities exist for donors to further catalyze capital in the region by addressing key financing gaps. Many of the barriers identified —such as challenges in accessing working capital, the lack of tailored de-risking instruments and limited early-stage capital- can be mitigated through innovative, bespoke financing solutions.
4.c. Support provision of concessional capital for early stage project development
Finally, the early-stage project development in conservation, restoration, agroforestry, and integrated livestock activities remains a significant bottleneck, especially for smaller NbS projects. Donors can help bridge this gap by investing in dedicated vehicles or developing new ones aimed at channeling capital to smaller, community-based projects.
Catalytic capital could typically be offered through three key strategies:
The first two strategies can attract private investors by enhancing returns, though in different ways: Option 1 increases investable capital by eliminating management fees, while Option 2 protects investor principal through a First-Loss Tranche (FLT). Option 1 is particularly effective for supporting fund managers with limited expertise or financial capacity to launch a fund. Option 2 is better suited when the main challenge is fundraising, especially in reaching first close — the minimum amount of Assets under Management (AUM) required by anchor investors to make the fund operationally viable. In this scenario, the donor’s investment in the FLT contributes directly to the first close, helping unlock significantly larger capital flows. Additionally, unlike non-repayable grants, this approach allows the donor to potentially recoup and reinvest the capital.
In addition to contributing to concessional tranches of funds, donors could fund technical-assistance sidecars to absorb project preparation costs – such as feasibility studies and technical assessments – offering grants that are refundable only if projects reach profitability.
Further, subsidizing design-stage costs for new blended finance funds could accelerate their development and mobilize greater capital. This approach would not only improve fund sustainability but also allow donors to gather insights and disseminate best practices. Potential partners in this space are asset managers with established teams and experience in early-stage project development.
5. Conclusion
There exists a deep potential pipeline within the Global South for high-quality NbS projects, that today suffers from the lack of aligned capital to enable their evolution through to gestation, growth and maturity. Concessional capital either from public or private sector, in this context has a unique role to play to underwrite certain risks, relatively less understood by the asset managers, thereby improving their bankability and modifying their risk-return profile, prompting the crowding in of larger institutional cheques that support these large scale NbS projects on multi-decadal timelines.