If you’re working up your renewable energy project finance plant, be it waste-to-energy/biofuel, solar, hydro or any other, it’s worthwhile understanding from the get-go the kind of finance you’re going to be looking for.
Financing a new project is far removed from an M&A, VC, Mezz or similar transaction. The dynamics are fundamentally different through two, key, considerations:
- The investment, be it debt or equity, is predicated on the track record and financial stability of whoever your PPA is with, not on your assets or balance sheet. Along with all your contractors and other counterparties to the project they need to show track record and financial stability.
- Project finance can be defined as investing against revenues from a yet-to-be-built asset, from which mainstream investors are precluded by their own regulations. While there is abundant capital available for energy projects, the nature of project finance demands in-depth and granular due diligence by investors. Allow anywhere between four and 12 months from submission to financing.
Renewable energy investors come overwhelmingly not from mainstream lenders but from the private markets. These are hedge, private debt/equity, alternative investment and similar funds along with asset managers, family offices and other private capital allocators. They have $multi-trillions into projects across all sectors worldwide.
Experience shows that projects are usually led by experts in the relevant technology, its market and other matters. But rare is the project leadership team that has expertise in its actual financing.
Equally, there is a growing cohort of investors who are coming to understand the benefits of the project finance investment structure, but still ‘feeling their way’ through the many moving parts involved. Both the buy- and sell-side often need mediation and both need to take a collaborative approach to the transaction. Key to your project financing is the evolving close co-operation between the insurance and private capital markets. Insurance ‘Wraps’, backed by Lloyds-of-London, now protect the investment with interlinked policies covering the entire project from site safety, contractor performance and PPA agreement fulfilment to political risk.
Long experience shows that it is vital to insert project finance experience and expertise into the project at its most formative stages. In that way, the transition to engagement and closure with an investor becomes far more seamless and less frustrating.