In clean energy investing, the deals are usually technically and legally complex. A state of being “fully investment ready” is almost always far into the future. Further, different types of deals may be appropriate to direct to different types of investors, and different investors will have different definitions about what it means to be “ready.”
Therefore, assessing investment readiness in a clean energy transaction requires knowledge of not only the clean energy technology and the legal framework, but also in-depth knowledge on investor types, relevant investment trends, and financing terms.
USAID PFAN-Asia considers that there are four types of investors:
- Impact-oriented investors
- Venture-oriented investors
- Project-oriented investors
- Corporate-oriented investors
Impact Investors: This group of investors seeks a specific social benefit, such as alleviating poverty of a target group, empowering women, or any one of many social goals. They are generally low risk, and look for a return on investment – these are investments after all, not grants. Small deal sizes are the norm: $100,000 to $5 million. Impact investors need positive returns, and some want high returns. These investors also need liquidity and an exit strategy, and some need it fast, in 2-3 years. Examples of impact investors are private equity funds, foundations, and corporations.
Venture Investors: This group seeks a highly scalable company that can offer high returns and in a quickly growing market. Correspondingly, high risk is okay. These investors are looking to back a high energy, super-talented, and intelligent team working on transformative innovation. Venture investors are Silicon Valley firms, private equity funds, and angel investors.
Project Investors: This group has no risk appetite at all – no technology risk, no market risk, no exchange rate risk, no construction risk, and no credit risk. In exchange, they will accept low returns. These investors look for larger projects, because it is expensive to analyze and manage all the risks that they are concerned with. For project investors, even $50 million is generally considered a small project. The project development maturity is a key decision factor (i.e., are the legal rights and signed contracts in hand?). These investors don’t typically provide development capital to create a project, as compared to an on-going B2C (business to consumer) company. Some examples of project investors are international banks, private equity funds, and strategic equity investors.
Corporate Investors: This investor group ideally wants a credit rating for a loan structure, or a strong and growing balance sheet for an equity investment. How they use the proceeds of a loan is not critical because the company is using its own balance sheet as collateral. Corporate loans are a low-risk business proposition. Examples of Corporate investors are local and international banks, and private equity funds.
Clearly, for each type of investor, a “ready” and “complete” investment package is different. The biggest mistake that USAID PFAN-Asia sees amongst project developers is incorrect investor targeting. So, developers must ask themselves, “what type of deal do I have to offer, and what investor type(s) are the best fit?”
* 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.