Energy project developers seek financing for wind, solar, and biomass projects; Social entrepreneurs seek investors to bring modern clean energy access to the people at the bottom of the pyramid; Corporations seek financing to green up their supply chain without a lot of red ink.
For all these seekers of financing, there is a methodology that can reduce costs, time, and risks. It is called an Investment Readiness Assessment (IRA). The IRA is a quick and easy to use tool that helps developers understand the status of their venture against the expectations of financing parties. The IRA seeks to answer one main question:How ready are you to show this deal to an investor?
The most “ready” condition is when you have a complete investment package that is prepared by suitable parties, which can be transmitted to financing parties who are interested in a deal in the particular geography, maturity, size, and technology that you are offering. That is an ideal standard, and is a rare case.
Complete investment package: A complete package means that you have readily presented and answered all relevant issues and questions that apply given the stage and type of financing that you are seeking. Issues and questions are different for different types of ventures: A wind project seeking a bank loan will have the equity sponsor fully identified. A high-risk venture capital deal will have experts who affirm that the proposed technology can work. A corporate loan proposal will have a credit rating of the borrower.
Suitable parties: A suitable party needs to be involved in the preparation of information. A technology-centered proposal should be affirmed by a reputable engineering company. For wind and solar projects, there are only a handful of companies that can develop a bankable resource study to international standards. There are trusted law firms, insurance consultants, builders, operators, equipment suppliers, and many other clean energy specialists whose involvement can make or break a financing proposal.
Geography and technology: For many emerging markets, the country location is often a deal-maker or a deal-breaker. Investors typically are either open for a country or closed. PFAN-Asia has, for example, found one investor open to deals in Indonesia but closed for Vietnam. Similarly, investors tend to take a long time to get comfortable with a technology, and then they only slowly may expand to other technologies. One investor we work with took three years to get active in solar, and another two years to build up expertise on wind projects, and is now dabbling tentatively in biomass.
Maturity: Maturity of a deal refers to the stage of development. An early stage deal is more conceptual, higher risk and lower value, but may represent more opportunity to those investors who can bring added-value in furthering the project beyond simply injecting capital. Other investors prefer more mature projects that have lower risk. Early or late stage opportunities can be a positive or a negative, depending on the investor being approached.
Size: The size of a deal is arguably the most misunderstood aspect of financing. Investors are usually inflexible about going outside their size range – sometimes called “tickets” as in large ticket size ($10 million to $200 million for energy projects) or small ticket size ($1 million to $5 million). Project financing needs large deals. Impact investors seek small deals. Venture capital needs small deals, but only ones that offer future scalability resulting in high risk and return. For example, clean energy projects looking for project financing will find it very difficult to find investors interested in small deals due to the sizable transaction costs involved.
So, are you ready to show your deal to an investor? Consider going through the IRA steps to determine if there are ways you can strengthen your venture even further, to prepare for approaching financiers.
* 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.