How Investors Look at Clean Energy Projects
There is a big gap in perception between investors and entrepreneurs when it comes to evaluating if the project is “investment ready”. PFAN-Asia rarely receives applications that can be directly introduced to investors without any further updates. Most of the time, there are fundamental questions left unanswered, and these areas require more information. Based on experiences from reviewing numerous project applications for financing, PFAN-Asia has identified the following key areas that developers should address in their project proposals before getting in front of real investors.
Brief Summary: Have a quick and easy-to-understand mental picture of your company and your project. Most energy project developers do a poor job of explaining what their business proposal really is. For example: “Planning to build a 20 MW wind project” is clear and easy-to-understand. In contrast: “Planning to deliver clean energy solutions” is not precise and therefore not a good business description.
Evaluation of Business Fundamentals: Know the key commercial aspects of the proposal, which will vary depending on the type of business. For grid-scale power projects, the key commercial aspects are usually the size of the project and power sales price. For rural energy access projects, the key commercial aspects might be the number of connections and perhaps a pre-negotiated subsidy.
Market Understanding and Analysis: Demonstrate market understanding by focusing on the relevant fundamentals for the intended audience. In the case of a rural energy access project, the market understanding might speak to the distribution and service supply chain. In the case of a waste to energy project, the market understanding is all about the feedstock supply.
Management Team: Identify a management team with the right skills, required at different times throughout the project. Power projects have four distinct phases: development, financing, construction, and operation. At the development stage of an onshore wind farm, for example, financing skills are needed to investigate if the investment case is economically feasible.
Operations & Implementation (O&M) Plan: An entrepreneur uses this section to demonstrate his/her understanding and management capacity to successfully start up a project or a company. It is, however, not necessary to detail all factors and aspects of O&M at this stage of a business plan.
Financials: PFAN-Asia usually sees financials projections that are far too detailed and have too many assumptions about complex financing structures. It is best to stick to the basics, such as showing an amortizing loan in 5 years if that is a transaction selling point. Power projects do not need to show a balance sheet, but B2C businesses might to demonstrate inventory and sales support.
Risk Mitigation: The key here is to show that you understand the most significant risks well, and that they are being managed by you or the appropriate party. As a counterexample, a developer may propose to cut costs on capital expenditure by taking on general contractor risk. This unfortunately usually backfires because a bank needs a bankable general contractor, not a creative knowledgeable project sponsor.
Maturity of the Offering: Developers are usually overoptimistic on their investment readiness, and frequently judge both themselves as more ready than they actually are, as well as investors as more interested than they actually will be. Therefore, it is critical to have a right judgment about the maturity of the offering relative to the appetite of realistic potential investors.
Investment targeting: This is perhaps the most important aspect of a business plan. Once a type of potential investors is selected for geography, maturity, size, and technology, then there are usually only a few investors truly available for an offering. Therefore, it is critically important to get the offering right the first time.
Professionalism and Presentation of the Proposal: This is often misunderstood and it is not about whiz-bang colors and glitz. This essential element is whether or not the proposal sets forth the key information clearly so that the reader can efficiently understand what is and is not there. Professionalism can also be demonstrated by referencing an estimation made by rule of thumb from industry experience rather than academically modeling with unnecessary precision.
Evaluation of available documents and other information sources: A business plan tries to say something about the source and quality of important data that the sponsor is representing. PFAN-Asia considers that the best authoritative data comes from prior project experience. For example, the cost estimation should come from a senior wind power engineer who has been involved in a several major projects.
To sum up, in order to approach investors successfully, developers are required to have a complete investment package ready, meaning all appropriate and relevant issues and questions are readily presented and answered, given the stage and type of financing sought.
* Daniel Potash is Chief of Party for USAID’s Private Finance Advisory Network for Asia, a program that aims to mobilize $1 billion of investment in clean energy, energy efficiency, and clean transportation projects. PFAN-Asia is a five-year program, from 2013 to 2018, implemented by Deloitte Consulting LLP, under contract with the U.S. Agency for International Development. PFAN-Asia focuses on seven developing country members of the Association of Southeast Asian Nations (ASEAN), including Cambodia, Laos, Indonesia, Malaysia, Philippines, Thailand, and Vietnam, and five South Asian countries, including Bangladesh, India, Maldives, Nepal, and Sri Lanka.