A New Blended Tranched Financial Structure for Early Stage Investments in Clean Energy

Abstract

We develop a novel blended tranched financial structure to help catalyze private capital flow to early stage hard technology companies in clean energy that are going through the classic Valley of Death in commercialization funding. Due to the well-known challenges of high risk, long lead times and capital intensity, Venture Capital firms as well as large capital providers such as pension funds, insurance companies and sovereign wealth funds shy away from investing in these companies at the critical scale-up stage of bringing their products to market. Our financial structure seeks to overcome these challenges by incentivizing private investment into a diversified pool of underlying early stage companies in this sector. It helps lower risk and lever-up returns for investors higher up in the capital structure by including a first loss tranche to be contributed by philanthropic entities, thereby leveraging their capital multiple times (5x to 10x) by making it attractive enough for the larger and long-term private capital providers to step in. We design an investment model that helps estimate the expected return and risk of each of the tranches in this financial structure. Philanthropic capital alone is not sufficient to commercialize all viable products and services in clean energy. Our financial structure has the potential to leverage that capital five to ten times, thereby drastically altering the future energy landscape towards much needed new sustainable technologies and ecosystems.

Keywords: clean energy, valley of death, blended finance, catalytic capital, sustainable investments, climate finance, green financing, additionality, philanthropic capital

JEL Classification: G10