Renewable Energy PE Overview
Hey folks. Spent a lot of time as a ghost on these forums back when I was trying to figure out what I was doing - figured I'd give back a little for anyone who's looking at the renewable energy infra/project finance space, with specific emphasis on the buy side.
I've got a slightly non-traditional background and got pretty lucky joining the firm that I did (top public school, no finance background). I taught myself project finance and started a consulting business for 2-3 years building complicated deal models (learned on the fly) for various parties. One of my clients was a small, relatively new PE firm, who I worked with for over a year. They offered me a full time spot and I accepted -- the credential of the partners was extremely strong and I'm a small firm sort of person so joining on as employee 1 was an exciting prospect.
Getting in the Door
Generally, renewable PE entry is slightly different than other PE posts. IB groups with an emphasis on power is definitely one route (like always) and we'll definitely look from there, but a lot great analysts/associates get their experience working in a project finance function at any of the larger project developers. Most developers are pureplay development shops where they develop contracts, and then sell them for a margin over the build/dev costs, but the larger developers may seek to develop strategies for holding projects long term. These long term yield-based cash flows allow the companies to achieve a lower cost of capital; as such, the internal finance teams gain a lot buyside-esque experience.
One of the important considerations in thinking about IB entrance vs a developer shop is the type of transactions that are done. Sell side for renewables doesn't normally entail very complicated models -- calculating EBITDA is not exactly rocket science -- but once you get into the various non-recourse financial structures (described a little more in next section), that's where things start to get complicated and that sort of experience tends to be highly regarded.
Like anything else, networking, and an ability to show that you are comfortable with extremely detailed models is very important. Beyond that, cultural fit is quite important -- renewable energy tends to be self selecting. While almost everyone I work with is in it for the money, the goal of putting clean energy into the ground tends to drive a lot of our purpose for doing this. Its nice to work for something that isn't just money.
Lastly, it isn't unheard of to move from real estate finance to renewables the two are quite similar and so the transition to renewable finance tends to just require a bit of training on the revenue side rather than the financing side.
Renewable Energy PE Basics
Renewable energy (project/structured) finance from the equity perspective means that, like most PE, we invest in the bottom of the waterfall. What makes our approach different is that the deals are highly structured around cash flows -- the projects that we invest in don't have operating companies or balance sheets. Rather, they generate cash flows through operations, which get distributed via a "waterfall".
In a traditional solar "back levered" deal, you'll normally find a "tax equity" investor as the first to get paid in the waterfall rather than debt (if debt were to get repaid first in waterfall, it would be called "front leverage" which has pros/cons but is less common than back leverage) -- tax equity investors finance projects for a right to claim much of the tax credits and depreciation benefits, and some preferred cash flows.
Next in the waterfall, debt gets sized based on target coverage ratios similar to other project finance -- the cash flow streams available for debt service will be the EBITDA, less the tax equity preferred payments/cash share and any reserves tax equity may require. Debt will normally include all sorts of other reserves and conditions that need to be met before equity gets paid out in the next stage of the waterfall.
Finally, equity gets their pre tax distributions. The key distinction here is that while most corporate PE is geared towards increasing the value of a firm for an exit multiple, we're solving for some sort of levered IRR, and a MOIC. A lot of the value creation is performed upfront in the pricing/bidding/negotiation/structuring process for acquiring the assets where we as investors may take on additional development/construction risk, and then sell the assets after a few years of operation at a lower cost of capital in more of a PE type approach.
Deal Process Overview: Origination through Operations
Origination generally occurs across two fronts: banked processes, and origination. Generally speaking, the banked processes will have fully baked/developed projects that are lay ups for less technical/risk-savvy investors with lower costs of capital. Not our cup of tea -- most of the origination is done by the partners who led Project/Structured finance at SunEdison. Most of the people in the market have either worked under them, or have worked with them before. Origination will generally include pricing the deals a number of ways to see how we can make a competitive bid (its a strong sellers market right now). If we get to an agreeable price, we'll work through a fairly comprehensive term sheet that will reflect much of the acquisition paperwork to follow.
We generally acquire projects under a "MIPA" or Membership Interest Purchase Agreement, which lays out set terms for both the seller (project developer) and the buyer (us) to meet in order to close and fund the projects themselves. MIPA negotiations, combined with alignment on pricing, are the two riskiest stages for a deal to either come together, or fall apart. Once the MIPA is closed however, the projects are technically viewed to be "under control" by the buyer, and we'll begin going out to capital markets for debt/tax equity and working through the various terms/comparisons there. Generally, when the acquirer/sponsor is legit and known in the market, debt and tax equity terms are pretty competitive -- we'll choose a counterparty based on who provides the best pricing, and how well we think they can close on the weird types of deals we look at. Our ability to close debt/tax equity in an equal to or better than base case underwrite for our pricing drives a large amount of our returns on a deal.
Once a project, controlled under a MIPA, is "construction ready", we'll officially acquire the project company into a fund, and begin construction (note: different investors have different appetites on construction risk -- we take it because we can negotiate/manage the EPC process well). Once its built and the necessary approvals are in place, we'll place it in service and begin earning distributions.
As there aren't a ton of pureplay renewable PE funds, the sample size here is small and the main answer is "it depends". Generally speaking, if you're on a good team, you're going to be comped pretty well, but its lifestyle adjusted. Maybe 3-4 times a year, you'll hit a 100 hour week during a closing, but generally speaking, you'll be working 9-6ish on weekdays. You might have an hour or twos worth of work on the weekend here and there, but generally speaking, weekends are off limits for work (again, except in the occasional closing). With that said, at the more junior levels, the comp isn't what one might expect at a Blackstone or similar. It's a tradeoff -- do you want to do really well comp wise and have limited free time, or do you value something a little more sustainable while still getting paid pretty well.
Hope you've found this helpful. We're taking on an analyst in our office in SF - if its something you'd be interested in, feel free to drop me a PM with some info about yourself.
This is an awesome write-up--thank you! Considering renewables PE for the same reasons that you articulated. Have worked on a few project finance deals but nothing wind/solar. A few questions:
Are there any resources you'd recommend for learning more about deal structuring and the development process for renewables?
What does the timeline for a typical deal look like? It sounds like its faster paced than most other sectors of infra.
How varied is your dealflow in terms of sub-sector, region, risk profile, etc?
Cheers -- thanks for the good questions.
Deal structuring is mostly learned on the job to be honest. The finance parts are fairly complex (see explanation on tax equity above), and I haven't honestly seen any truly comprehensive resources that would be recommend to someone new to the industry with no context. On the development side, the book "Renewable Energy Development" by Albie Fong et al is a good place to start, but bare in mind, its intended more for a practitioner to fill in the gaps I think. Gives a pretty complete overview of the process though.
Totally depends on what timeline you're asking about. If a developer comes to us with a well baked portfolio (e.g. permitting 90% complete), we can probably diligence and close within 60-75 days. But then you have the rest of the timelines - the buildout of the projects can take anywhere for 4 months to a year (depending on when it gets started - winter slows things down depending on geography), then the projects themselves are intended to have a 25-35 year life to produce cash flows. Investors may choose to exit these investments by selling them off though, and normally at a lower discount rate than we would have underwritten them for (if we're doing things right, anyway).
Would definitely imagine that its faster paced than most other infra structures, especially at smaller project sizes. Some developers don't focus on large projects, they focus on portfolios of smaller projects to put together enough MW for financiers to take a look at it.
Can't get into too much detail here, but we're set up with a variety of capital partners to be opportunists when it comes to generally higher risk/higher reward deals. This can mean a couple of things: we can come in earlier in the development process than many other investors (if the developer has a cash need to complete the project), or we can take on more merchant risk than others might be able to. We're generally geography agnostic (within the USA -- we only invest domestically), and focus our efforts on entering more complicated/misunderstood markets that larger groups might have a hard time trying to figure out a real underwrite for. This is where we can leverage our experience and create real value.
If you have some PF experience and are interested, would be happy to look at a resume.
Thanks man, same as above, definitely an area I have an interest in. Could you please mention some of the companies that would be big in Renewable Energy PE?
Also, to where do you think investments in the future will be directed? Seems like some countries eg Germany are beginning to realise that methods such as windfarms and solar are expensive at a very large scale.
The larger acquisition/investment groups and funds aren't always set up in a PE configuration, and it also really depends on what areas of the market groups are playing in. Generally, you'll see a mix of the following in the market: * Yieldcos (Past and Present) - These are/were publicly traded funds similar to REITs, that acquire and own renewable energy projects, in a manner that allows them to leverage lower cost of capital (most of the time), to provide yield to investors. Over a the last few years, a lot of them have been bought out and taken private by large funds such as Brookfield (acquired Terraform), GIP (acquired NRG Yield) or Capital Dynamics (acquired 8point3). This has mostly happened as cap markets have become cheaper for private investment. NextEra Energy Partners is an example of a still-public yieldco. * Strategics - Power companies take interest in renewables to expand their offerings into green solutions. These investors tend to invest on balance sheet (generally, large companies), and acquire renewable projects to expand their green portfolio of assets/offerings. Large insurance companies or other sorts of large long term investors who seek to decorrelate from the market for ALM purposes would also fall into this bucket. * Structured Investors - This is where PE (and our group) would fall -- we raise and invest private capital in a highly leveraged/structured manner to increase equity returns. We'll generally make a lot of use of project finance instruments (debt/tax equity/etc) on behalf of funds that we've raised, or on behalf of a capital partner we have a partnership with (e.g. a strategic that may not have the resources to devote to the details required to do this well). On the larger side, Goldman and MacQuarie both have dedicated groups. Other banks have RE groups as well, but most are more focused on the debt/tax equity investments (lower risk). There are also a lot of smaller groups that would fall into this bucket as well that would be great shops to work for. You'll find the most diversity in investment approach/thesis here.
Important to note that there can be a lot of crossover here -- strategics or developers can have their own YieldCo structures (Pattern Energy), developers can also raise leverage against their projects and own the cash flows (they'll get a lower corporate cost of capital if they have bankable yield). What makes any of these work, is having a strong, cohesive strategy, and knowing how to execute.
From the outside, renewable markets probably look pretty bread and butter, but on the inside, its anything but. You have energy storage starting to come online and dramatically change the way people view solar investments (and additionally, the value you can capture from peak demand windows). Solar is trending away from large projects, to smaller, decentralized projects, that tend, when spread across a state, can reduce the need for transmission infrastructure investment that may have been required at one large power center. I wouldn't know the first thing about Germany, but in the US, wind is alive and well (although, outside of our scope). Its a pretty exciting time to be a renewable energy professional as more and more state-level policies create new markets, and technology improves. Generally risk adverse capital providers are becoming more and more open to merchant-esque structures (as opposed to PPAs), which opens up a host of new opportunities.
Fun times in the RE market.
sorry about that - for some reason the word "storage" was triggering the spam catcher... way too general a word to be in there and not sure how it got in, so that is why your comments never published, but they were saved (why I published this version - your first) FYI
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Is it common or possible for those in development companies to jump over to PE?
Yes. I think I mentioned this in my original post. Working in the PF or M&A division of any semi-large developer or strategic is a very practical way to get some early experience.
Woops didn't read entire post, thanks.
What resources did you use to teach yourself PF modelling? Doesn't seem like there is much online. Did you also have to learn macros?
In terms of comp would you say the base is similar to IB with bonus being lower?
Finally, would you consider other infra PE or potentially corporate PE (not sure if that jump is possible)
Straight from undergrad to renewable PE possible?
Its possible. Obviously less likely, but would depend a lot on your internships.
Thanks so much for doing this thread-- I'm in IBD Power so this all makes sense to me but I never saw it laid out all in one place like this! Three questions for you:
1) MBA-- Is this as big of a deal as it seems to be in blue chip PE? I have some friends who are in the middle of their starter PE jobs and starting to hear the noise about getting an MBA to move up / be partner track... would you say that that's as prevalent in RE?
2) Headhunters-- I know you had worked with your eventual company before, but any advantage to going through headhunters? I thought going through the usual suspects might be useful for some of the bigger shops with dedicated RE groups that I'm targeting (though ultimately I think I'd like to be at a smaller shop), but curious if there's any headhunter firm in particular that RE folks like to use.
3) Networking-- I'm on a sell-side for solar right now and our contact log includes many of my target funds, but wondering how gauche it is to use that (obviously not reaching out to anyone still active in that process, but wondering if people will still think "hmmm how did they get my email" vs doing the LinkedIn / alumni thing). And am I right in thinking I should do some casual calls with associates first and then reach out to principals and more senior folks?
Thanks again! Currently trying to stay in NYC, but I'll message you if I change my mind about SF :)
Sure thing. MBA not a big deal on investment side. Experience is a big deal and a fair few who didn't start in renewables will do an MBA to pivot to renewables/etc. With that said, the MBA network can be really helpful in getting in - lots of Berkeley MBA folks from bay area (others obviously too, just see the most concentration here).
Project finance is pretty particular/specific and most of the time, we don't expect any deep dive level of training from most MBAs. Have heard that this is changing in some schools though.
Honestly, I have no idea. I see them pop up on LinkedIn for jobs, but the reality is, RE is pretty niche. If you actually have a solid background at a good company, and a group is hiring, you've probably got some pretty good chances of getting to the interview.
Have no idea regarding using your hitlist. LinkedIn is a pretty good way to go. If you're going cold, associate/senior associate level is probably a good place to start. Alternatively, hit any of the conferences and get out there. I did REFF Wall Street when I was first trying to break in and met tons of senior folks -- just need to know how to conduct yourself. If you're already doing IBD at a good shop, you're probably fine.
wow, thank you for putting together such a comprehensive guide! Very helpful post!
Thoughts on tax equity phasing out? And do you typically invest in contracted assets or you take merchant risk?
Was going to ask the same question. I used to work in energy/power and we kicked around starting up a tax equity fund. I wasn't heavily involved but we did look at a few solar companies. It was a while back but I remember the economics were tough without the ITC and a tax equity sponsor to partner with. We were father up in the value stream (just installing) but I'm not sure if manufacturing has got significantly inexpensive since.
Sent you a PM
Very helpful post. I also have a non-traditional background and I'm deciding between two offers to begin after I graduate this summer:
- infrastructure transactions advisory
- solid Tier 2 generalist consulting (think Deloitte S&O, LEK, Strategy&).
My end goal is infra PE or infra banking. I'm interested in hearing about exit opps for the transactions advisory role. It looks like as a consultant, I could lateral to banking later on. I'm interested in assessing the feasibility of getting from infra transactions advisory to banking or the buy side in infra.
If you're looking to move into infrastructure specifically I would take the transaction advisory role, so long as you think you will get project finance modelling experience. Some Infra TAS roles at the Big 4 firms are heavily focused on FDDs/QoE's and so you get little modelling exposure. I've seen people go directly from Big 4 Infra to Infra PE, but your mileage at these shops really does vary.
Thanks for the tip!
How does compensation compare between analyst and director levels at developers (ie. Pattern, Invenergy, EDF, etc.) v. Private Equity?
I'm currently at one of the above developers working in a project finance capacity. I currently work 50-70 hours a week as an analyst in a MHCOL city and make $90k salary with a 15% bonus. I have under 2 years of experience post-undergrad.
Awesome write up. Question for you, with so much capital and firms flooding into the renewable sector, how will you manage to achieve equity returns (when mezz and infra funds are willing to do significant financing at lower single digits?). Also, everyone seems to be projecting that power prices will rise in the future yet with so many projects in the pipeline this seems counterintuitive...would love to hear your thoughts. Thanks again.
No longer at the firm, but you're right to note that its a hard biz right now. The areas my past firm focused on were the really complicated markets that were pretty tough to build an underwrite with any credibility at all within a substantial level of time investment such as community solar and other stuff on the fray. Utility scale market is beyond crazy.
Thanks, ob38dn. This is one of the more insightful blogs I've read on renewables PE. I work in M&A at a renewables company run by ex-SunEdison members in Asia Pacific. I've been meaning to pivot to a renewables PE fund. In additional to the great advice here on networking/technicals, would you have any advice on steps I could take to expedite this move?
Nice, when I made this post I was working under the former heads of PF at SunEd and TerraForm, so we're probably in the same orbit.
Honestly, if your modeling chops are half decent, just hit the networking hard. In the US at least, the talent market is absolutely insane - demand far exceeds supply and I saw plenty of analysts we didn't hire due to lack of experience/fit land pretty insane roles at big funds over the last year.
Solid thread, thanks for the write up! Just have a few questions if that's alright as I'm very interested in the sector.
* Do your best to make decisions based on the strength of the team - developer, investor, etc. Experience in PF at a good development shop is worth more long term than at a shitty buyside shop.
* Biggest targets were always folks who knew their stuff but carried themselves in a calm, collected way. Deal work is hard and how you compose yourself counts for a lot.
* No, I spent 6 months leading project finance and business development at a high speed rail startup, got tired of crappy leadership, and spent a year building a financial modeling startup which I've recently announced (note the name change).
Hey this is a great write-up- would you say it's possible to get into PE Renewables if you specialize in Renewables/Infra at an AM/HF, or is the transaction / project experience absolutely necessary? Thanks!
You absolutely need transaction and IB experience for infrastructure PE
renewables / Infra focused AM&HF isn't even a thing - there's not that many pure plays on renewables
I mean, it's definitely a "thing" considering I'm in one of those roles, but good to know about the transaction experience.
Would someone from buyside private credit (generalist) stand a chance? or would someone with project finance experience win more looks and come out on top every time?
Of course someone with PF experience would win more looks, but you're probably overestimating how many of those folks are out there. Demand for talent dramatically exceeds supply right now and I've seen some insanely unqualified hires over the last - get your act together, take a tax equity course, get networking. You'll be fine.
I started out this past year in a non-power IB coverage group and am quickly realizing I'm interested in a long term career in renewables PE. Would it be better to stay in my group (top group at the bank, historically places into MF and UMM PE) or try to switch to the much smaller Power group that isn't as well known? The coverage group I'm in does all in house modeling but none of it is project finance. Thanks in advance, and thanks for the great write up!
Mate, you can't even begin to talk the talk without experience. Do whatever you can to get the right exposure.
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