Finding the Private Benjamins: Bridging the Dev Cap Gap

by Matt Lucas (Tuatara Development Capital/Biofuels Digest) We read with interest CJ Evan’s piece about the need for development capital (“Dev Cap”) to expedite the development and deployment of projects in the energy transition space. CJ is completely correct: Dev Cap is both incredibly important to project success and mostly unavailable: it’s simply not a recognized investment class. We at Tuatara Development Capital (“Tuatara”) are working every day to change that by providing Dev Cap to worthwhile projects, demonstrating attractive returns for capital providers, and building a constituency for this new investment class.

What is Dev Cap?

Dev Cap provides the funding needed to pay for the pre-construction activities including G&A for the project development team, site acquisition or optioning, FEL & FEED engineering, permitting and other technical consultants, legal and professional services to negotiate commercial agreements, and debt- and tax-equity- preparation work needed to bring a commercial-scale industrial or infrastructure project to the point of bankability with lower-cost non-recourse investors. . In short, Dev Cap funds the project development work that comes prior toconstruction financing of debt and equity. At Tuatara, our commercial experience has taught us that projects will spend between 5 to 10% of their eventual total project cost (“TPC”) in the development phase, with smaller projects being on the higher end and larger projects being on the lower end of that range. These can be substantial sums in the millions or tens of millions of dollars that must be raised and spent prior to a commitment from construction capital providers.

Why is Dev Cap hard to find?

The use of non-recourse project finance to fund new technology infrastructure is a relatively new phenomenon. Prior to the late 1990s, most large scale infrastructure was funded through public dollars or on the balance sheet of large corporate players. As a result, Dev Cap was a cost of doing business and covered by the corporate or governmental entity. As a result, Dev Cap sits between several established sources of capital and few players have built up the expertise needed to appropriately underwrite Dev Cap opportunities, particularly in frontier technologies verticals of the advanced bioeconomy. Dev Cap fills the whitespace between VC, PE, and Infra:

Tip #1: Right-Size Your Project

For technologies that permit it, right-sizing your project can be helpful to attracting both Dev Cap and eventually raising construction financing. Tuatara spends most of our effort on mid-cap projects–projects with an expected total cost of $100-400M. These projects are large enough to attract Tier1 EPCs and have multiple routes to debt, yet are small enough to allow any single infrastructure fund to invest the equity. This is also the range that has historically been most successful for first-of-a-kind and frontier technologies.

Small-cap projects (less than $100M project cost) are too small to attract infrastructure investors on their own.

Tip #2: Start by planting a Tree, not a Forest

Few business plans stop after the construction of the first project, however focusing too much effort on the development of a large project pipeline can distract from the effort needed to actually see your first (or first two) project through to construction financing. READ MORE