Hi,
I will start my new job in a few weeks time. Its my first private equity job. The fund will specifically focus on renewable energy projects.
What kind of tasks should I expect to get? Is renewables PE any different from regular PE in terms of financial analysis with DCFs, etc?
Thanks
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Congrats on your new role! In terms of becoming familiar with the space, the best place to start is probably by looking for some primers on the industry which will take a more macro view and will provide you with some helpful context (i.e. decarbonization, government incentives, specific power market dynamics, build up of levelized cost of electricity, etc.).
With respect to your question on what kind of tasks you should expect to receive, that's a bit of a loaded question and would depend on how your fund is structured. As an analyst I would expect that you would be involved in modelling/financial analysis, various diligence work streams and preparation of presentation materials.
To your second question, the valuation of renewable assets, or power assets more broadly, tend to be a bit different from a traditional business because a lot of these assets have some form of contract in place which dictates the sale of power (industry jargon for this is a 'Power Purchase Agreement' or an 'Energy Purchase Agreement'). In addition to that, there also tends to be contracts in place on the cost side which dictate the scope of services required to operate and maintain the assets. Because the top line and cost figures in any given are generally quite predictable, the cash flows you can expect to generate are quite stable and the most intuitive way to value assets with predictable cash flows is with a DCF.
I'll pause there before I get too carried away, but I'd be happy to answer any specific questions to the extent you have any.
How do investors make good returns in this space given the revenue and opex are already set and there is so much competition for renewables assets?
They don’t lol. But slightly more seriously the IRRs on these are usually lower and may be occasionally supplemented by govt incentives.
Similar to any other element of finance - taking more risk. Finding more lucrative markets, buying assets earlier in their development cycle so there is a lot of risk the asset doesn't get built, betting on future policy as a tail wind, etc.
There's very stable elements of renewable investment (IE operating projects, sold to Insurance companies at a 5% return) thats for sure. More risky assets / platforms can make 15%+ returns.
OP - feel free to DM me. Associate in the space
In the context of a renewable energy project with set profits, what is the risk that needs to be accounted for? I'm assuming counterparty risk is huge (i.e. purchasers go bankrupt or don't renew their contract)?
Counterparty risk is big, especially given the number of corporate PPA’s out there. Construction risk (equipment, contractors, milestone dates, etc.) because if you don’t get the project completed on time you can lose your tax equity investor or PPA. O&M risk - this comes back to equipment suppliers being able to honor warranties
Those are a few of the big ones but every project has their nuances.
Congrats! Mind shedding some insight on how you were able to land the gig? First year pubfin analyst right now and the renewable PE space is something I’m interested in for the future
Sure. I have 2 year experience under my belt in total. 1 year of being a macro analyst/project manager at the influential local business association (essentially an industrialist lobbying group), where I worked with energy/decarbonization from both economic and policy side. Last year I quit that job and joined a hedge fund, which specializes in energy transition ecosystem (from miners to utilities, etc.). To be honest, my role there wasn't a regular equity analyst, but rather "cross-asset" analyst, meaning that I also helped out with rates and FX. Nevertheless, I watched closely what other analysts are doing and learned a lot about this space.
So bottomline, my pitch to PE firm was that I have 2 years of experience working with energy/industrial companies, that I'm well connected among local industrialists (they asked for a reference from my past employers, which I was glad to provide) and that I covered/modelled public European utilities (which is half true, half lie :) ) and that Im not only an analyst but have good soft-skills (worked with legal stuff, participated in high level meetings, etc). Also I think I low-balled with my compensation... There were 4 interviews in total and 1 excel task (modelling project cashflows, IRR). I also stressed how I am passionate about this space/tech and would love to continue my specialization here. When they asked about why I quit my job at the hedge fund, I said that I want to do something where my work results into an "actual real-life, physical" product, and I'm not interested into becoming a trader.
To be honest, the interviews went smoothly, I felt confident and they seemed to like my vibes, which helped a lot and I didn't need to worry about that. The most stressful part was that the whole process took 2.5 months.
Let me know if you would like to find out more.
Whereabouts are you located? I have a similar background, but am not really sure how to angle
Project modelling is a lot different. Check out resources by Ed Bodmer and Corality. There's also something called tax equity which is embedded in almost every proejct in the US which is an absolute nightmare that is impossible to learn about outside-of-the-job. Just be prepared for a very steep learning curve. For now get familiar with standard finance concepts and Excel shortcuts.
Wow my first impression is that this Ed Bodmer site looks like exactly what I searched for, with free models and everything (!?). Will also look into "tax equity" concept.
Thanks a lot!
To be hiring a lot of O&G people in the next 5-10 years
You're going to need to learn a lot of (a) Project Finance and (b) modeling out Reverse Tax Equity (solar/wind projects use this modelling approach, I believe).
https://edbodmer.com/wind-financial-modelling-and-resource-analysis/
Reverse tax equity isn’t a phrase anybody uses - sounds like you’re aiming for tax equity partnership flip
Reverse tax equity isn't a thing. Tax equity comes in 3 forms: partnership flips (by far the most common, 90%+ of deals are this; would say 99%+ of wind assets will be this), lease pass-throughs (maybe 7-8%) and inverted leases (1-2%). There are nuances amongst all of them.
Kind of hijacking this but is anyone else who works in this space kind of exhausted or disillusioned with just how technical and complex everything is. The complexity of TE and TE accounting and the level of detail and time spent on negotiating every detail of transaction documents sometimes gets overwhelming. While complexity can be interesting I more often just find it all very dry within renewables. Anyone else feel similarly?
Every person in renewables feels the same way about tax equity. Outdated structure from the 1990's that was useful when the LCOE of wind/solar were still high.
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