Ep364: Inside Middle Market Tax Credit Transactions

(upbeat music) - Welcome to Currents, a Norton Rose Fulbright podcast. I am your host, Jim Berger. Today, we are joined by Enigo Renquivo, co-founder and CEO of Concentro. Welcome. - Thank you very much, Jim. It's a pleasure to be in the Currents podcast. I've been a long time listener, so thank you so much for having me and having us. - Great to hear, we're glad to have you. So first, I wanna start with you telling us a little bit about what Concentro does and the role that you play. - Perfect, yeah, so Concentro is a tax credit broker focused on the middle market or DGE assets. Beyond just matching buyers and sellers, we also provide what we say a turnkey solution for parties to transact, where we take care of absolutely everything from diligence, to legal documentation, to advisory and even sometimes we also take care of tax insurance. More broadly, we also have a couple of additional business lines. So I always think of Concentro having three pillars. The first one I already mentioned are tax credit business and that's 95% of our activity. But we have two other business lines. The second one is more broader product finance advisory, where we help some of our clients secure other financial products. We're spending little time here just because we lack the resources and we're a little bit of activity. And our third business line, and that's been a very exciting development, is an AI software diligence product called folio. It was a spin-off from a software tool that we build internally to run diligence on portfolios and that some of our clients ask to use. So we carved out a software product. Maybe we'll talk a little bit more about that, but that's primarily who we are at Concentro. - Okay, great. Yes, I will ask you some questions about that. But before we get to it, your main business is the tax credit sales. When you are engaged in one of those transactions, do you represent the buyer or the seller? How does that work? Or are you just a marketplace where they come together? - Yeah, so I'll make actually, I'll start with the end and I'll make it's like clarification which is we tend to brand ourselves more as a broker. We started being more of a marketplace that's very quickly based on the segment that we play within. We found that a more wide-cloth marketing service played better for what we did. We do a lot of DG, we do a lot of portfolios or like smaller assets. So it allowed us to either break down larger portfolios to make one buyer's appetite or aggregate smaller projects to meet another buyer's appetite, right? So we sort of slightly pivoted, having said that everyone's technically some flavor of the marketplace, but now I'll answer your first question. It depends on the deal. So I would say roughly one-third to 50% of our deals, we represent those parts. And that's a little bit more of a dance in which like you cannot take a side and which is sit in the middle and help both parts. And then I would say one-third, 25% each, we represent the buyer or the seller. And I think those are instances where we partner with a lot of players on both sides and like maybe we're working with an investment bank that's shared some projects and we have one buyer that was best fit for them. So now we're representing the buyer. Or the other way around, in general, we may have more projects than buyers and we're not gonna feed also of advisors, players in the space and they may have buyers and now we're representing the seller. So, but answering the question, we do a little bit of both but there's a good amount of deals where we're representing both. - So I wanna talk a little bit about how your position kind of in the DG middle market segment. And just thinking back, when the IRA was passed several years ago, transferability was this new concept. And the intent behind it I think was really to unlock tax credit financing for those sponsors and those projects that we're not able to get the big players or the syndicators or what was out there. And I think the middle market and the DG sector was especially difficult to get tax credit financing. And so I think that's clearly what you're focused on has kind of the ideas behind transferability been fulfilled or has it been just a different way for larger projects and larger sponsors to monetize tax credits. - I think it's done its job, but it's been a rocky ride and it's not as simple as it was intended, bro. And I'll give you a little bit of context. So when my co-founder Tawanai started the company, we're actually, it was before the IRA and we were exploring ways to make DG financing more efficient and accessible, right? So we're working with a lot of people from our network, developers, IPPs trying to understand what the Ricky struggles and where we could play a role. And in that process, the IRA was passed. And for us, I think there were two key takeaways. First one was like, look, this looks clearly what exactly what you said, Jim, it is a way to make tax credit monetization mechanisms accessible, right? Tax equity was not accessible for the smaller project or like complex portfolios and so on. And secondly, for us, it was like, look, this is a perfect product to start with. It's something new. It looks like it's gonna solve a big issue for a lot of the people we're talking with and it accounts for somewhere between 32, even 70%, we haven't seen those 70% of the capital stats. It was also not an East product, it was like a meaningful amount. So that's how we decided to start. I think early on, we were missing some guidance and there were a couple of factors that meant it was becoming another way for larger guys to monetize their credits. But with time, I think we've sort of gotten there and I think it's a success. I think some of the initial factors maybe included that one, I think transferability has been simpler but hasn't been simple, right? Buyers still have recaptured this allowance risk and I think the only thing that they're saving from a tax equity deal is all the complex structuring, right? That some of the other things remain and also some of the legal documents are still heavy. Number two is who were the early interest, right? Because this is a complex thing for tax directors and everyone was jumping at the opportunity. We got a lot of this substitute to be true in the beginning. So the larger players were the first ones to come and those guys were not going to entertain this model. And I think there's a non-negligible factor which was tax insurance. The threshold for some of these buyers to get comfortable was to have tax insurance and feel protected. But at the same time, tax insurance was not available for the smaller ones and just to add to the equation, some of these smaller players or projects were the ones that buyers would actually feel more comfortable with and so you would need more insurance to some sort of like catch 22 situation. Having said that, I think slowly but steadily buyers are entertaining smaller projects. I believe there was a lot of work done by the industry and the ecosystem from players like us, CP firms, law firms and all the above to educate tax directors, VPs of tax and so and so forth. And with ultimately government, I think happened till the one big beautiful bill. It was a question of when and how much not if I'm going to place my credits. It is true the last year has been a little bit tough and especially for the smaller credits and happy to develop a little bit more on that. But I think in general, taking a step back is just a success, right? And the numbers speak for themselves. I don't know what the late is, but it's a market that has become $30, $40 billion overnight and it's a complex tax transaction. So I don't think we can disregard the five that it's been a, it sounds success. - Yeah, I agree with that. Okay, so in practice, what are you and your company doing differently to facilitate these middle market deals? Because at the end of the day, it is still a tax deal, it's still complicated and there's a lot of issues and concerns that buyers typically want to be protected about against. - Yep, so it's a very good question, Jim. And it's not just a petition and like, hey, we're tackling the middle market because it's underserved and maybe there's less competition. It also requires doing a few things differently. And I think it's gonna connect with some of the things that I said before. The first one which I already mentioned is we operate more as a broker than a marketplace. Our experience was that it worked better for this smaller product. So portfolios and I already mentioned that it allowed us to either carve out a smaller portion of a portfolio or aggregate smaller projects to match someone's app. The second thing and I think that's the main one is that we get really, really involved. I feel for some of these smaller deals, if we just did a low touch marketplace play, it would mean 50% of the deals with full part, right? So what we do is we take care of the diligence, we prepare a diligence memo for every single deal, we go very deep. And the idea of that is we not only add another pair of eyes but sometimes we save time from buyer's counsel and there's actually a few buyers that rely on our work. The second thing is we provide the legal forms to transact. I think today that's less meaningful. I think everyone's counsel already has a form. But the first year that was a 50K difference in deals that could like change the economics. The third one is we advise our clients throughout the deals and for first time buyers, especially smaller companies that might be the friends that you don't feel overwhelmed and the last and maybe the last thing that I think merits at point on its own is that we I think we pioneered probably the first we called them portfolio policies but in practice what it meant is we would aggregate multiple deals under the same policy and that included different buyers and different sellers and the idea here was like a half a million one point five three million dollar deal was uninsured and that when you aggregated ten of those and you created fifty million dollar policy and each one of those products had similar planners they all used the same legal forms and all had the same diligence memos and diligence packages then it was more digestible for the insurance it was not super simple but by doing so we allowed a lot of different sections to happen and to feel like a commodity for buyers like a buyer in insured tax credit which was something that didn't exist I think I have to give a lot of credit to the alliance team here they invested a lot of time in resources with us early on when we had no track record or anything so it's not all in us we wouldn't have done it without them but I think that's maybe the last thing so just quickly recapping we act as a broker we take care of everything and we bring this like portfolio tax insurance concepts to make tax credits transfers accessible for the middle market okay and given your focus on the middle market and the DG projects what technologies do primarily work with is it just solar or is there anything else yeah so initially it was primarily solar but I think now it's expanded quite a bit and initially we brought it ourselves as the platform for DG tax credit but I think that endurance more solar and now we use more the work middle market because now we're working with other technologies right so our bulk is CNI solar and community solar but now we're doing a lot of biogas actually recently both ITCs and 45Cs and we're beginning to do also a lot of battery storage with also done and I don't want to go through the full underlies but we've done 45x we've done 30Cs we've done geothermal CHPs and we've also done wind PTCs so we've done a little bit of everything but I would still say that like at least 50% plus of our relationships are solar and developmental person IPPs and do you work with any large utility scale projects yeah that that's a good question and and sometimes it's trouble for us when we brand ourselves as like middle market is like you don't want to lose some of those and the sure answer is yes and we can certainly work with larger it's just like it's more of the commoditized offer that we can give right like for the smaller projects I believe we bring something new to the table and we might do a better job than other firms that are not specialized but for utility scale project it will come down to like are we bringing the best buyer for this credit and the answer might be yes but I cannot pitch how we would do this much better than someone else right but again the answer is we do work with larger projects we are actually transacting now some utility scale assets and but yeah but our focus is primarily middle market okay you know before transferability tax equity is dominated by a few big banks you know there were some other players but we've seen or at least in my practice I've seen a proliferation of other companies enter the transferability market who were not traditional and are not traditional tax equity investors but they like the I think the idea of buying a credit so are they the same entities that you're seeing in your deals or do you have sort of a different set of buyers for these middle market deals I believe we we're also seeing a proliferation of other firms right personally we haven't worked with any of the large banks I think they also have their own origination capabilities but for example we've closed six deals with 4 to 500 that have been under 50 million dollars and 60 million dollars right so we've done smaller transactions with some of the large banks but what I would say is I think the number one player in the middle market tax credit transfer space might be regional banks I think those are the most prevalent and I think they are an interesting intersection of mid size but financially intact savvy that they they can operate here whereas it might be a little bit more daunting for a corporation that is not specialized having said that we've seen a lot of multinationals with like mid size operations in the US with work with advance of private equity mid caps and in general these are more financially savvy as well and we've also worked with with some Russell 3000 lastly for this smaller deals we've worked with individuals you probably know Jim there's like some complexities with passive activity limitation rules but still some of the some high net worth individuals have passive income and they can buy half a million dollars 300k million dollar credits and we've done I think 5 to 10 deals with individuals okay that's interesting I know it's it's very difficult for individuals to take these credits so good to hear that you've transacted on those and on the other players that you're seeing you know the regional banks the multinationals the Russell 3000 companies do you typically see them come in for one deal a year or one deal every two years or are they repeat players so in general they're they're repeat but the two caveats that I'll say is the sample size is three years max and the second thing is the one big beautiful bill changed everything right so I'll give you an example we work with a few Japanese buyers and with stars they didn't participate last year in the market we work with a couple of other players that suddenly with the one big beautiful bill didn't have a tax later with the last year so then it's difficult to differentiate are they not repeat or we had a one off and actually some of those are coming back so that the answer is they're probably repeat right and and what you see is when you're a tax director and something has been working well you don't change it right and especially when it's like a daunting transaction so if you work with consent row is gone well and everyone's happy why look for a new firm and not like risk to the process right so we actually see more repeatability with buyers and sellers which is an interesting insight maybe for us so I want to move on a little to kind of your diligence you mentioned your AI and kind of the process that you guys go through so one challenge I've noticed in my practices a you know a couple million dollar five ten million dollar deal is going to be just as much work for the lawyers the consultants everybody involved as a hundred million dollar deal or two hundred million dollar deal with I guess first questions would you agree with that I think I I sort of agree like I would not do not agree but I don't think it's a I don't think it's as much but probably a five million dollar deal is like 70% of the work of a 40 50 million dollar deal I'm oversimplifying and and we always I I've heard a bunch of times and I probably agree with complexity scales with number of assets not with dollar amount I would agree with that and I think that's also probably treat I think it's somewhere in the middle but the reality is that so the answer is yes I agree okay so yeah I agree with your point that the number of assets is going to impact the amount of work more than the dollar value or the size and megawatts so throughout your process you know you talked about AI and how you guys take care of a lot of things can you talk more about how you conduct diligence on most of your deals and how that model is scalable yeah so I would say initially it was not very scalable right and that's one you said that we wanted to realize before building technology right when we started the company the idea was we think technology can play a big role here but we just don't want to build technology for the sake of it so we started doing our first deals and really very quickly realized the insight in your shirt and that it was not scalable at the model and we're being swamped by diligence so then we we thought hey what were the key things where we were spending most time and at the end of the day I'm not going to share anything new for the audience but like number one was reviewing documents number two was validating data we spent a lot of time close to close things making sure all of the information in in the tctax if it's was correct all the data points used to calculate the credit work correct and so on so forth and that required a lot of work and just in other like normal diligence and coordinate like the checklist and back enforcing everything so we started building technology for all of those and that's how we came up fully right I think now today's technology is probably some AI flavor that's what we built and and first it was the component to process documents faster organized data room extract information allowed the room you process to be faster then how can we fact check every data point that we use with those documents and then we start building some tools and then very quickly we realized we were doing deals five to ten x faster diligence processes and I'll say Jim I think like the biggest surprise was not how fast we would move but now we were way more precise especially the things were on data validation around us to like main note make less mistakes or no mistakes processing documents faster make sure we were not having any oversights we got to a very exciting point and up to a point where some of our clients said hey could we use that for our own purposes so we ended up carving out and I introduced in the beginning a software solution called Folio that just brought this tools to some of our clients. We, of course, too call the overfitting for taxpayer transfers so they can use it for other purposes and other documents, tools and everything. And that's a new, exciting business line. >> Okay, that's interesting. So I think what I heard was as you prepare the diligence and everything you're using, your folio application, and then you can also, clients can also use it for other transactions, is that right? >> Yes, so I'll take a step back again, which is we conduct diligence and we would do the same work everyone would do and we prepare diligence memorandum. What we build were tools to allow us to do that process more efficiently and more precisely. And we still do that in every single deal. And every party that translates with us has access to those tools, is they find them helpful. What we also did was carve out that solution as a separate software that an IPP can purchase and used to get ready for a lender or a tax equity investor or to manage their portfolio. Or that a competitor of ours for sake of argument who used to run diligence. So it's like separate from our transaction business and it's something that people can use for their own purposes. But in maybe Jim, I also say something that like maybe it's important to flag which is all these AI tools are we call them crashes or aids, right? So it's not like hey, we throw this in a black box and we say like hey, Chad GPT or Claude, just tell me what you think, are we good to transact? There's more things that allow us to do our work faster but it does not substitute our work a single bit. It's just like things that allow us to move faster but nothing that is in black box that we cannot see what the process was. >> Okay, yeah, that is very similar to my experience with AI. You know, you can't tell it to draft a contract or look at this document but you can use it to summarize a document or find provisions much quicker. So that's interesting. And when you use your tools to prepare the diligence memos for example, how I'm interested in understanding how a buyer of tax credits would then use it. Like do they still typically have their counsel to do diligence or they even hire counsel. I'm just trying to understand how, you know, your process can, how it, oh, I understand how it makes it more efficient but how it could, you know, replace certain aspects of a traditional deal or how it just kind of greases the skids and makes it more efficient. >> Yeah, I think it's more of the ladder. So most of our buyers use counsel and counsel does their own diligence. So what we do is like, look, counsel X, here you have our findings and our diligence memorandum. And we try to that very quickly before they jump into it in case it helps them save time. So they review our memo and there's like things that are less controversial and they can just do it quick-fact finding and say, okay, we're comfortable. And there will be other provisions that like, hey, we also need to review this thoroughly and get comfortable and then at the very worst is consensual reach the same conclusion. So then we act as a safety net. And the goal is it just makes for everything more efficient. It brings a little more comfort to buyers like two different parties and you are ensuring the third one are getting to the same conclusion. So that's more or less how they use it. Now some of our buyers trust us enough that they sort of rely on our work and then they send it to their CPAs and they just like run a couple of checks that they're comfortable with their work. Of course, we're not attorneys, we're not CPA. So nothing that we provide is on a reliance basis and anyone can use. But it's more like, hey, that's the if you have a knowledgeable party they can review this and get you comfortable. So that's more or less how it's used. And yeah, not sure if it was part of the question, Jim, but you said like how we prepare these memos with the AI. Basically, we use the AI to go through our checklist and get comfortable with the control, place, and service and a few other things and review the documents. We roughly memos ourselves wouldn't use the AI but then what we do is we use the AI to review the memo and fact check against everything and make sure there are no gaps or no things that we've used to represent there and everything. So again, there's something that we use as a safety net rather than a substitute that just drops the memo for us. You can do it, but we don't do it. - Interesting. And you had also mentioned in addition to kind of using the AI and preparing the diligence memo, you also have forms of the transaction documents that you provide for the parties. In your experience, do the parties generally just take those and update them for the specific transaction or are they negotiated significantly? - It should mix back and it's changing a bit, right? Like early on, everyone will take our forms and then depending on how much council was engaged, they will be heavy or not so heavy negotiation. I think how that's involved is those deals that were heavily negotiated with, they've turned into now council brings their own forms just so they don't use ours. And the transactions that were lighter, they still use their forms. And especially repeat buyers keep using our forms that worked from like a couple of years ago. So sometimes we even have to tell the sellers, like hey, if it looks a little bit outdated, it's just like this buyer has used this for three, four years, still holds through. So probably this is going to be simpler. So it's a mix back, Jim. So I don't have a perfect response or I would say it's a 50/50 of either heavy negotiation or their own forms and a 50% of, they use the consensor forms. I'll say probably each one is biased by the size of the transaction. If you think about smaller deals, chances are, it's probably an 80%, 90% are formed, no heavy negotiation, lack larger deals. Chances are council will bring their form or the use hours and heavily negotiate it. And now that you have several years of experience with these middle market tax credit deals, do you have any best practices for buyers, kind of first time buyers who are looking at these credits or first time sellers who may have portfolio of rooftop projects? - Yeah, so I'll probably have more advice for sellers and for buyers. My advice for sellers, it's always is like, one, don't come to the market until you're prepared. I think there's always your nest to come as early as possible. And then there's like slippage risk and maybe you don't get place in service and like all of the things or you spend six months in diligence and the documents are not final and that's the worst of both worst for everyone. So it's like, just come when you're ready, have an organized data room process. That's where we can help. And lastly, bring the issues up front. Like don't try to like hide something under the carpet because it's not a problem. It's a term sheet false apart because you disclose something that they're not comfortable with. It's a huge issue. If three months in, you disclose a problem that they're not comfortable with and everyone spends a lot of money, right? So that's the advice for sellers. The advice for buyers because also we want to cover ourselves and make sure you're doing is to engage council, help to your CPAs, make sure you're comfortable with this and we just try not to be pushy. And maybe there's some advice around like just calibrating your diligence work to the size of the deal and the type of the deal. And like maybe you don't have to go deep on title for, I'm going to exaggerate it for reciprofolio. But at the same time if you're doing a large deal, you have a lot of like single sources of issue. So just calibrating a bit but less advice for buyers, more just like run yourself at the right council. Probably that for the sellers too. But for your sellers who just don't rush it. OK, I think that's useful for most types of transactions. All right, my last question. Just kind of looking to the future. You know, there's a lot of headwinds in the market. Fioc, obviously now earlier sunset of tax credit, deadlines, interconnection bottlenecks, just recently more tariffs. So how optimistic are you about the future for the DG middle market and for tax credits in general? I'll say Jim, maybe I'm delusional, but very optimistic. You mentioned all of them. So I don't want to go through a long release. But there's a lot of headwinds, right? You have Fioc, and I think that disproportionately affects DG because it's short construction cycle. And price will be exposed earlier. The earlier sunset also heavily, disproportionately affects DG assets because they have short construction cycle is tougher to save hardware assets. Although I think developers and I think you've done a fantastic job. And Delusional saw political uncertainty, tariffs, not so great news in the communists order from et cetera, et cetera. But having said that, I think just from a first principles perspective is we need a lot of energy. Like with the AI wave, this is like you need a lot of energy to come. I think in the past years, we've played somewhere between like 50 to 60 gigawatts of new capacity or either new capacity. And the next year is going to be more than that. And I think it's been like 95% solar battery in wind. And I don't know who can explain to me how a different technology will substitute that. I know some people are bullish on gas. I'm not an expert on gas, but I know there's a lot of bottlenecks for turbines. And it's not going to get there. So we need a lot of solar. And we need a lot of wind. And we need a lot of battery storage to have a more reliable grid. So just from that fact, I'm very excited about the sector. The question will be, how is this finance, right? And maybe there are no tax credits. And we will have to-- service other financial products, but those projects will be paid for one way or the other, maybe it's more expensive off-take, maybe it's in the subsidy, maybe it's states chiming in with state programs, so there will be ways, but we just need those projects to happen, and there's no other way. And then being specific about the GE, when you think about the interconnection bottleneck after permitting for larger projects in the congested grid, you need distributed assets, and also if you need energy fast, those are the ones with short construction cycles, so I think just saying at that is like you can have as many at wins as you want, but we need those projects, so either we will overcome those headwinds or politicians will have to backtrack and it provides more subsidies and more things, because otherwise energy is going to be twice as expensive in a few years from now, so that means we're very bullish, we're very excited for what's to come, maybe we're going to have a rocky couple of years, but I think the middle long term is very excited for the industry. All right, that's great. That's all the questions I have, so Enigo, thank you for joining us today. Dan, thank you so much for having me. You can find us online at www.projectfinance.law or send us an email at [email protected]. Please rate, review, and subscribe on Apple podcasts, Spotify, or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the currents.