Raising Money and Attracting the Right Investor
In this book, we repeatedly refer to the developer. The question is who stands behind the developer? The sponsors are often investors in both the Project Company and the developer, but sometimes the developer is independent and seeking funding for the Project Company alone. This chapter will be of particular use to smaller developers who do not have a parent company’s large balance sheet sitting behind them. The likes of Engie, ENEL, Acciona et al. are corporate behemoths within which sit developer teams in business units that operate the Project Companies as subsidiaries or joint ventures.
As an independent developer, it will often seem as if you have a constant requirement for funding. The costs involved with developing an energy project are constant and, at times, unpredictable. While the need for money can seem overwhelming, I can recommend an approach to raising finance and attracting the right kind of investor.
Before You Start Negotiations
The following questions should be asked:
1. At what stage of the project lifecycle are you currently?
2. How much ownership are you, as a developer, willing to give?
3. How much time, money, and effort do you need to reach the project launch?
1. At what stage of the project lifecycle are you currently?
Referring to Chapter 3 on structural aspects of a project and the Project Lifecycle you will be familiar with the three main phases of a project:
1. Development: Feasibility studies, permits, environmental and social impact assessment, basic and detailed front-end engineering and design
2. Implementation: Construction and commissioning
3. Operations: Generation of value and servicing of debts
From an investor’s perspective, the stage of your project will determine its risk profile and, by extension, the project’s valuation. All things being equal, the further along you are in the project lifecycle, the less risk perceived by investors. Different risk profiles will attract certain kinds of investors. Put simply, the more risk perceived by an investor or bank, the higher the return they will demand.
Once you are at the stage where all contractual agreements are secured and the project is ready for financial close, the more likely that low risk, steady return investors such as private equity and infrastructure and pension funds will be attracted to invest in your project.
On the flip side, should you be at an earlier phase, the more likely that a venture capital-type or specialist investor, with a deep knowledge of the kind of project that you are developing, will be attracted to invest. While most people would typically look toward the financial services sector for an investor, I would encourage developers to look at finding investment support from the project’s foundation stakeholders.
2. How much ownership are you, as a developer, willing to give?
Most developers let personal attachment to their project get in the way of any talk about raising money. You need to be as dispassionate and rational as possible. I have seen so many negotiations run aground because of a developer’s unrealistic expectations as to how much he or she is willing to give up in return for investment.
The fact of the matter is, you need money and someone else can provide it under certain terms. At the earlier stages of the project lifecycle, you should base your valuation not on what the model says the project will eventually generate but on how much time, effort, and money you have put into the project to date. Time, money, and effort are relatively easy to record and can be a useful basis for framing your own account of how much you have put into the project and how much more is required to achieve the project’s realization.
3. How much time, money, and effort do you need to reach the project launch?
The answer to this question will be of use to you when calculating how much of these three factors you have, as a developer, put into the project to date and what you have achieved as a result. From an investor’s point of view, they will evaluate closely what has been achieved and use this to evaluate how much time, effort, and money they will need to put in order to realize their own return on investment. Having a realistic idea, from your side, of how much of these three factors are still needed will greatly help you in any negotiations.
Engaging Investors
Now that you have asked, and hopefully answered, the three questions posed earlier; you will need to begin the process of engaging potential investors. My recommendation is to start as close to home as possible. Foundation stakeholders will have a more intimate knowledge of your project than most people will and so should need less time to get up to speed with the finer points of risk and valuation. A line of approach for each is suggested below.
Equipment suppliers: Most equipment suppliers are manufacturers or resellers who are only interested in generating sales. For them to invest in your project would require you, as a developer, to demonstrate the reward to them of taking on additional risk. Why would they do so? As the developer, it is your task to sell the benefits of the project to them, which could include:
• High-profile entry into a new market
• Pilot project to test a new product
• Significant financial benefit above and beyond that from straightforward sales
Now you will have noticed that the second benefit offers significant risk to you—being a guinea pig for new technology is not an ideal scenario and you will have to make a judgment based on your requirements at the time. Should the project prove to be a success, the last benefit will mean that you, as project owner, would have sacrificed a significant upside of the project—that of financial gain.
The aforementioned benefits cover both strategic and financial interests of the equipment supplier. It is up to you as the developer to identify and research the best-suited equipment supplier for your project based on your needs. This process naturally involves some compromise—you may not end up with the biggest or the “best” supplier in the market, however, you will have achieved your goal of obtaining funding and moved closer to your objective of delivering your own energy project.
Offtakers: In my experience, raising money from an Offtaker which is a private entity, will be easier than doing so from a government entity. Government entities’ interests tend to span wider than those of any other stakeholder. When approaching and persuading your Offtaker to participate, let alone invest, in your project you will need to have answered several questions:
1. Is the project value for money? Here you will have to demonstrate that the cost of the energy service compares relatively favorably with that of alternatives. This is a challenging task mainly because of the time and effort that will be required to perform the necessary research into the cost of alternative energy sources.
2. Is it affordable? There is no sense in approaching a government Offtaker for investment if you know that they cannot afford to invest. This is where your research into international sources of funding, provided by the likes of the International Finance Corporation, can be of great use to developers operating in emerging markets.
3. Can it be achieved? The answer to this question lies in your ability to demonstrate your own capabilities as a developer of delivering the project to expectations.
4. Is it necessary? Energy is a necessity for any economy and the provision of low carbon and sustainable energy in a post-COVID-19, net zero carbon context is even more so. The challenge here is that the government in question will be weighing up your project with its other priorities for example, food security, poverty, natural disasters, and so on.
Your “pitch” will need to demonstrate at several levels that the project will be of an overall benefit to the government Offtaker’s interest. By contrast, convincing a private entity to invest in the project will require you to demonstrate that their commercial, strategic, and financial interests are met.
EPC Contractor: These contractors operate in a highly competitive space and are constantly on the lookout for new projects in which to participate. That being the case, the opportunity to participate free of any tendering or competition is usually an attractive one and should be an option that you explore when seeking investment. An EPC contractor who also invests in the project will be as committed as you are to ensuring its success. You should therefore approach EPC contractors as potential partners that can be of benefit to you, the developer, in terms of completing the project.
Until your project is within striking distance of achieving financial close, I would not advise you to consider investment from professional investors. Professional investors that is, private equity funds, banks and so on require a very different approach when raising money. The cornerstone of discussions with them will be your project’s financial model and the term sheet you should have obtained from the Lead Arranger.
This will need to be developed to an advanced stage and with as many of the assumptions verified independently. Many developers, given their nature and educational background, opt to work on the financial model themselves. My advice would be to not do so—engage a specialist who is impartial and can develop the model to a higher degree of detail than you can. As we saw in the chapter on financial aspects of the core principles, there will be several versions of the financial model by the time financial close is reached. Hiring a financial advisor or even letting the Lead Arranger take on this role makes good business sense. Let me assure you, a professional investor’s financial analysts will dig into the model to a depth and level of detail that most nonspecialists do not have the time or ability to achieve. You are therefore better off focusing on other areas that will benefit more from your particular skill-set as a developer.
Any advancement in investment-related discussions will usually involve a term sheet being exchanged. This is simply a document that lists the mains terms under which two parties agree to progress discussions or negotiations toward a formal contract. A term sheet typically contains the clauses shown in Table 8.1.
Table 8.1 Contents of a typical term sheet
Background and legal preamble |
This will contain what the purpose of the term sheet document is from a legal perspective. It is important to state that the term sheet is an initial agreement, which will set the parameters for further discussions, and a more formal agreement later. It will be helpful to recount the history of discussions between the parties and what the respective expectations of both parties are from having these discussions. |
Glossary |
Most legal agreements contain a section where both technical terms and acronyms, both those that are general and those specific to the term sheet, are defined. |
Definition of the parties |
It is stated here who are the legal entities involved. |
Description of the project |
This will contain detail on the project that the developer has been working on. |
Description of the transaction |
In this case, the transaction would be either a sale of equity in the project to an investor, or a loan to the project by a bank. |
Duration |
The length of time for which the term sheet is valid. |
Confidentiality |
The term sheet should be confidential between the parties with no information shared to other parties without the written consent of the disclosing party. It is usual to widen the scope of confidentiality to include foundation stakeholders who may wish there to be transparency over any discussions between the developer and funding partners. |
Exclusivity |
An investor will usually place a restriction on the developer discussing with other potential investors. This is because some time and effort will need to be spent in order to turn a potential deal into a closed one. |
Due diligence |
This will cover specific areas that the investor/bank will want time to study: commercial, financial, legal, technical, tax, and so on. In short, the investor will want to verify all of the information that has been provided by the developer. |
Applicable law |
An oft-overlooked detail. Most parties will stipulate the jurisdiction with which they are most familiar. Government entities rarely sign agreements under a foreign country’s jurisdiction. For many parts of the world, English law offers a convenient compromise. |
The list in Table 8.1 is not exhaustive and term sheets can contain many more clauses that will reflect the investor or bank’s requirements.
If you are fortunate enough to have reached the point where you are considering a term sheet from an investor, the main point to consider is that the time and effort required passing due diligence will be considerable. During this phase, the investor will go through every aspect of the project with a fine-toothed comb. The parallels with this process and that of the due diligence with the Lead Arranger should not be lost on the reader. Indeed, some efficiencies can be gained by integrating the two processes as much as possible to save time. The following list is designed to give you an idea of the areas that will be examined:
Commercial: All contractual arrangements in your project will be scrutinized. Most developers tend to focus all their time on the offtake agreement, which, while crucial, is not the only commercial arrangement that can jeopardize the bankability of a project. Engineering, Procurement and Construction (EPC) contracts are often overlooked by developers who end up taking the first contract offered to them. An EPC contract should primarily offer a high degree of certainty on the Capex and the start date of the operations and contain provision to mitigate any associated risks.
Financial: All the financial implications associated with your project will be tested. From the investor or bank’s point of view, their main concern here is on the affordability of the project to sustain the repayment of their investment under adverse conditions.
Legal: The legal validity of ownership and rights pertaining to the project. The investor will examine all permits, land documents, lease agreements, history of ownership, regulations, and evaluate what adverse risks or material impact these could have on the valuation of the project.
Technical: Technical due diligence will revolve around the choice of technology. Is the equipment expected to perform to the required standard over the course of the project’s life span? Questions such as whether equipment will need replacing, and what provision has been made for replacement and maintenance, will be raised. Once again, the main concern here is whether the technology poses a risk to the investor of recouping their investment.
Once due diligence has been completed final negotiations around valuation may take place. At this point the developer may find that their earlier expectations around valuation may be challenged, while I would not encourage a developer to “give up the farm,” I would stress that you are at the point where the investor or bank have something that you need— money, and that this money is tantalizingly close. You should therefore be pragmatic and keep your eyes on the objective.
Post Financial Close, the developer’s focus should be entirely on overseeing the construction of the project and the subsequent operations. Construction projects, by nature, are highly complex and typically take longer and cost more than originally envisaged. I would advise the developer not to take on the role of project manager of the construction; this considerable task should be left to the EPC contractor who should report on the progress of construction to a steering board on which the main stakeholders, including the developer, should sit. The governance around the Steering Board should follow guidelines set by project management standards of the likes of Prince2 or the Association of Project Management.