INVESTMENT GOVERNANCE IS THE KEY FOR A SUCCESSFUL INVESTMENT FUND.
Investment governance is the key for a successful investment fund. We rely on proven methods of traditional financing to ensure the projects that are funded have the best chance of achieving long-term success. By these means, we work to remove the risk associated with investment. Energy infrastructure has always been a relatively secure place for investment capital and by exercising caution we aim to achieve a high level of success. Here are some of the methods we use when assessing capital investment:
Entitlement funds are limited to 5% of total project costs
The entitlement phase of projects carry the highest risk. Environmental evaluations, permitting, interconnections and power purchase agreements are the pieces required to complete this phase. We strive to perform rigorous due diligence prior to starting the entitlement process to give the greatest chance of success. We will only allocate 5% of the proposed project cost to the process of entitlements, and certain milestones must be met along the way. We have found that by performing this process we gain certainty on the entitlements and are not subject to the costs other development groups feel they are worth.
Energy infrastructure relies on guaranteed performance over long periods of time. One way to ensure profitability is to enter long-term purchase contracts with credit worthy buyers. By these means, you can virtually guarantee the bankability and long-term success that was expected. However, in some instances, it can be more profitable to sell open market and achieve faster profitability goals. In this circumstance, we need other assurances that our profitably goals will be met. Some of these assurances can be historic market and some can be projected market. In either case, the benefit must outweigh the risk associated. One way we have found is to take a percentage of the project capacity into a market situation while still contracting a larger portion so the risk is mitigated. Each project is different and we strive for the guaranteed revenue on long-term contracts as this is the safest way for predictable returns.
For a project to make financial sense, we have a minimum return set as a goal. If the project does not meet this goal, we do not feel it is a good use of capital. In negotiating the agreements for project off-take, construction, and associated fees we strive to secure a position that is greater than our minimum revenue milestone. We bear in mind that sometimes projects need to meet sustainability goals and that is a consideration in the total return of a project if that project is close to the minimum goal.
Working with Traditional Financing
There are projects that work well under traditional financing models of debt and equity. In these cases, we prefer to provide the equity side of the financing and potentially the construction financing to ensure the lowest cost of capital for long-term debt. Under these circumstances, it allows us more liquidity to maximize our project pipeline.
Limited Deferred Maintenance
In an effort to maximize revenue, we have seen companies that disregard the need for timely maintenance. This can have detrimental effects. We prefer to spend a small amount to keep projects maintained regularly instead of having much larger deferred maintenance costs. This helps make costs predictable and avoiding large replacement costs due to equipment neglect. We see the benefit of having predictable, long-term returns instead of short sighted gains.
Acceptable Purchase/Exit Strategies
There are number of strategies that will look attractive in various stages of development or operation. We assess the purchase/exit strategies when they are presented or seek out buyers if the situation is warranted.
- PPA purchase/exit: Exiting at the PPA stage seems to be normal with companies not being able to raise the financing or are in the business of greenfield development. We have had many opportunities to purchase the development package, and we have sold projects at this stage as well.
- Purchase/sell after construction: Companies sometimes sell within the first two years of operation depending on the incentives to the buying party. Typically, an exit at the 3rd or 4th year onwards is more likely after initial operations and data verification.
- Exit to Strategic Party: This option typically involves a Utility or Self generation model that motivates the buyer with a cost reduction in the energy produced.
Joint Venture Partnerships
There are many situations that cause a joint venture partnership to make a lot of financial sense and secure investments beyond the traditional nature. When we are approached, or seek, a joint venture partnership is established with the benefit of both parties in mind. The list of joint venture partners we typically work with are utilities, large commercial or industrial users, and self-generation clients, but we stay open to options that may meet your needs.