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.