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Founder and Chief Executive Officer - SUSI Partners AG - Switzerland...

Founder and Chief Executive Officer - SUSI Partners AG - Switzerland
Investing in Renewable Energy Infrastructure - Private Equity Funds vs. CDOs?

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  • 1. Sustainable Infrastructure Financing: Investing in Renewable Energy Infrastructure - Private Equity Funds vs. CDOs? TBLI Conference Europe 2010 November 12th, 2010 SUSI Partners AG Tobias Reichmuth Fraumünsterstrasse 11 CH - 8001 Zurich Switzerland Tel: +41 43 497 26 10 Fax: +41 43 497 26 11 Email: t.reichmuth@susi-partners.ch
  • 2. In the next 20 minutes… Part 1: • Introduction: SUSI Partners AG • Groundwork laid for renewable energy funds • Business model: how does a renewable energy infrastructure fund work? Part 2: • The SUSI Sustainable Euro Fund • How can renewable energy infrastructure funds be securitized? • Pros/cons of creating sustainable infrastructure finance CDOs 2
  • 3. Introduction SUSI Partners AG A Truly Sustainable Fund Advisory We are: • Fund Advisors to our own Luxembourg Fund Structure • Focussed on Renewable Energy Infrastructure • Strictly transparent We do: • Investments guided by the Brundtland definition • Minimize investment risk before maximizing profits • …believe, that doing no harm is not good enough We have: • Successful First Closing (Pension Fund, Utility, 3 Family Offices) • 3 investments done (IRR >14%), € 95m (equity) in the pipeline 3
  • 4. Groundwork Laid for Renewable Energy Funds Global Warming and Energy Dependence Call for Renewable Energy Global Warming Electricity need is raising • EU Directives on the Promotion of Electricity from Renewable Energy Sources • Renewable Energy Sources Act (Germany) • Guaranteed Feed-in Tariffs in many European countries Renewable Energy as an investment opportunity Renewable Energy Funds 4
  • 5. How Does a Renewable Energy Infrastructure Fund Work? Example Solar: (Radiation x Feed-in Tariff ) – Cost = 14-17% ROE Capital Total investment: € 7„431„202 Equity: € 1„114„680 Debt: € 6„316„521 Revenues Solar radiation: 2„083„951 kWh € 0,42 / kWh1 Turnover p.a.: € 875„259 (=2„083„951 x € 0,42) Cost Operating cost p.a.: € 74„858 Feed-in tariff Land-lease: € 34„000 guaranteed by the Interest/amortization p.a.2: € 561„665 government Taxes3: € 8„196 Total cost p.a.: € 678„719 Return Cash Flow to fund: € 196„540 Return on equity p.a.: 17,6% CO2-Reduction: 754 tons p.a. • 14-17% ROE is achievable with a solar investment • A 2.1 MWp solar plant in France saves 754t CO2 p.a. – that equals the emissions of 251 cars!4 1) Depends on FIT agreement vintage year and country 2) Annuity credit with an interest rate of 5,5% (interest year 1 = 347„409 and loan reduction year 1 = 214„256) 3) Minimal taxes levied on project level since the project is mainly financed with shareholder loans (fund investment) and debt 4) The reduction varies with the country specific energy mix. In France the production of one kWh electricity generates approximately 362 kg CO2. Furthermore, an average car with 200g CO2/km produces 3 tons CO2 per year (assumption: 15‟000km p.a.) Note: The Fund holds the project for a maximum period of 7-9 years; equity will be released from the project‟s sale; example of a 2010 French 2152kWp solar roof top park 5
  • 6. Agenda Part 1: • Introduction: SUSI Partners AG • Groundwork laid for renewable energy funds • Business model: how does a renewable energy infrastructure fund work? Part 2: • The SUSI Sustainable Euro Fund • How can renewable energy infrastructure funds be securitized? • Pros/cons of creating sustainable infrastructure finance CDOs 6
  • 7. SUSI Sustainable Euro Fund Focus on Solar-PV and Wind Onshore: High Diversification Strategy Geographical Technical Diversification along diversification diversification the value chain 23% 23% Solar Wind 20% 50% 50% 100% 23% 31% 80% Germany Solar Operational Italy Wind Turn-key Belgium France 7
  • 8. SUSI Sustainable Euro Fund Value Creation: Focus on Turn-Key and Operational Projects SUSI Investment Example: Return on Return on Return on 2MW wind equity p.a.: equity p.a.: equity p.a: park 20-30% 15-25% 10-20% Low risk Moderate risk High risk SUSI Investment Example: Return on Return on Return on 1MW solar equity p.a.: equity p.a.: equity p.a.: roof park 20-30% 15-25% 10-20% 8
  • 9. Why is a Renewable Energy Infrastructure Fund Most Probably the Best Investment Opportunity in the Current Environment? Correlation Matrix Absolute Return (indexed to Dec. 1, ‟05) (quarterly IRR calculation) 20% 1600 15% 1500 10% 1400 5% 1300 1200 0% 1100 -5% 1000 -10% 900 -15% 800 -20% 700 -25% 600 2005 2010 2005 2010 • 10-14% annual return • Minimal correlation Renewable Energy Infrastructure Sample Portfolio • Low risk S&P 500 • Truly sustainable DJSI (Dow Jones Sustainability Index) • Transparent Swiss Federal 10 Year Bond …is currently hard to beat. 9
  • 10. SUSI Sustainable Euro Fund Summary SUSI Sustainable Euro Fund is… • …investing in solar (PV) and wind parks (onshore) only • …a high-yield fixed income style fund, distributing stable yearly double- digits dividends • …having a very low correlation with stock markets SUSI Sustainable Euro Fund is not… • …a J-curve private equity fund • …investing in shares of technology companies 10
  • 11. How can a renewable energy infrastructure fund be securitized? Case Study 1 SUSI-Partners EQUITY Bank DEBT 80-85% 6 3 Cash 5 CDO Tranches proceeds from notes 2 CLASS A+ Cash Certificates of proceeds Special from notes indebtedness Purpose CLASS A Credit protection Vehicle payment Protection Interest and (Issuer) Interest and CLASS B Bank„s Pool of principle principle seller SUSI-Partners Project Finance (Intermediary) CLASS C Premium Credit 4 Loans protection payment Senior Credit CLASS D Default Swap Premium Provider CLASS E • Guaranteed stable returns would allow for a CDO structure • CDO can only be used for refinancing • Currently, direct loans at 3.0 to 5.5% are possible • Therefore a CDO structure only can make sense with low interest and therefore with a significant volume 11
  • 12. Benefits of creating a sustainable infrastructure financing CDOs Benefits: • Recovery rate is guaranteed with proven technologies and sound government FIT • Post construction, there are little cost overruns or operational issues; furthermore, projects will be less likely to default after having amortized a substantial amount of debt • CDOs can facilitate utility and institutional investor appetite to purchase „green assets‟ • Lower correlation compared to a typical corporate bond portfolio • Help accelerate sustainable infrastructure financing Challenges: • Currently cheap financing available without CDOs – is it worth it? • Credit Ranking needed (diversity of projects might be an issue) • Market stigma against CDO 12
  • 13. Thank You For Your Attention! SUSI Partners AG Tobias Reichmuth Fraumünsterstrasse 11 CH - 8001 Zurich Switzerland Tel: +41 43 497 26 10 Fax: +41 43 497 26 11 Email: t.reichmuth@susi-partners.ch 13
  • 14. SUSI Sustainable Euro Fund Fund Terms Currency Euro 2% (on committed capital during the commitment period of 30 months after first closing and on Management fee the afterwards invested capital) 0.25% (on committed capital during the commitment period of 30 months after first closing and Service fee on the afterwards invested capital) Performance fee 20% Hurdle rate 5% (cumulative) Expected return 10-14%, distributed annually (IRR over fund life time: 16-20% via exit upside) NAV calculation Quarterly Duration 7 years after final closing; subject to two 1-year extensions Final closing December 2011 (target: EUR 100‟000‟000) Minimum subscription EUR 125„000 14
  • 15. Back-Up Exit Strategy: Significant Upside Potential Investment year 1 Project Exit Total investment: € 7‟430‟000 SUSI Investment Equity: € 1‟110‟000 SUSI Sustainable Euro Fund invests in solar and wind Debt: € 6‟320‟000 parks which profit from feed-in tariffs for 20 years guaranteed by the government. The Fund‟s term is 7 Returns year 1-7 years; therefore, for any project exit the potential buyer Total returns1: € 1‟274‟000 profits from… Debt amortization2: € 1‟772‟000 A) operational projects which produce electricity, IRR3: 16.40% B) a 7 year project track record, and Investment year 8 C) projects that benefit for another 13 years of Investor after year 7 “guaranteed” turn-over Total investment: € 5‟928‟000 Already now, the minimal market price after year 7 can be Equity: € 1‟380‟000 determined by use of the DCF-method. Debt: € 4‟548‟000 For the project discussed (solar park France, equity € Return year 8-30 1‟110‟000) and provided that the debt amortization is Total returns: € 3‟695‟000 based on an annuity credit, an exit value after 7 years of Debt amortization: € 4‟548‟000 operation will be € 1‟380‟000. This allows a double-digit IRR: 10% IRR for the new investor over the rest of the project life time. Hence, the exit value covers the equity by 124%, which represents a significant upside potential and reduces the exit risk. An external investor will pay up to € 5’928’000 for Further-on, the Fund profits from a portfolio premium the this project after year 7. The SUSI equity (€ when exiting projects. 1’110’000) will be covered to 124% by the investor (project equity price € 1’380’000 with 10% IRR). 1) Return after cost, tax, and interest payments equals € 180‟000 p.a. 2) Debt amortization of annuity credit 15 3) Sales of the initial equity price of € 1‟110‟000 will result in an IRR of 16.4%; an exit for the market value of €5‟928‟000 results in a project IRR for the fund of 19.3%
  • 16. SUSI Sustainable Euro Fund Due Diligence Flow Chart (Solar): 4 Stages Ensure Project Quality Preliminary Criteria - Country/region developer - Technology (modules, inverter) - Quality and experience of project - Radiation/feed-in tariff - Expected annual returns and project IRR - Permits/licenses complete - Data quality 1. Project Due Diligence 2. Investment Committee / 3. Local Due Diligence 4. Unanimous Industry Experts Recommendation • Radiation survey • Critical due diligence on market, • With local partners (lawyers, • Investment Committee to • Verification of all permits (incl. developer, project level technical, tax experts, etc.) Fund BoD checks with local authorities) • Review of used technology • Double checking all contracts, • Verification of counterparty for • Double-check all permits permits, etc. land lease/purchase • Recommendation for local due • Micrositing, contacting local • Adequacy of technology for diligence authorities, grid operator, land micro climate owner, general contractor • Financial modeling, exit options, preliminary tax analysis • Double checking of analysis by debt partner • Recommendation to Investment Committee 16 Note: Similar process for wind parks; slightly different process for operational power plants
  • 17. Sustainable Investments, Business Model, Market Market Environment: Ideal Time of Entry (e.g. Solar) Technology Projects • Excess capacities; • “Off the shelf” projects technology prices with attractive pricing down by 30% in 1 year • Operational power • Mature technology 18„000 plants on the market • Buyer‟s market in • Project developer with 2010-2012 substantial experience • Downstream value • Buyer‟s market creation Globally Financial • Attractive debt rates 12„000 Crisis/ installed MWp in Spain Solar p.a.1 Effect1 Market & politics 6„000 Electricity demand • € 1‟000bn. investment • Need for energy planned worldwide independence • Established markets • Strong trend to 0 (Germany, France, 2000 2005 2010 2015 electrification Italy, Belgium, Spain) Techn. Demand • Generally rising • From subsidized to Techn. Supply electricity demand sustainable markets • Higher cost of fossil • Broad political support fuel due to CO2-tax/ supply shortage • For the next 2-3 years, there will be a highly favorable window of opportunity for long-term investments in renewable energy infrastructure • The market has changed; for SUSI Sustainable Euro Fund this presents an ideal time to enter the market 1) The Spanish government surprised many developers by placing a sudden block on new solar projects in Spain 17 Note: for wind energy a very similar situation applies
  • 18. Back-up Risk Management: Risk Avoidance on all Levels Market Construction • Government guaranteed feed-in tariffs • Experienced general contractors • Focus on developed markets (Germany, France, • Payment after completion and Italy, Spain) grid connection • Only Euro investments Project • Turn-key or operational External factors • Project developers with local • Very low correlation to other experience asset classes • Proven technology • Strictly ecological • Tax optimization1 • Loss-of-use insurance Management Fund • In-house competencies • Well-established partners; • Adequate lead time external NAV calculation • No key man risk • Asset backed; very low exit risk • Industry experienced Investment- • High diversification Committee 1) Please consult page 31 to learn more about the tax optimization strategy. 18
  • 19. Back-up EU With a 20% Renewable Energy Target For 2020 Italy Spain France v Today EU target per country (2020) Germany EU target overall (2020) in % To reach the EU targets, large investments in renewable energy infrastructure are needed. For SUSI this means a wide open window of opportunity for the target markets. Source: EU Comission 2010 19
  • 20. Back-up Industry Forecast: Solar Industry Offer/Demand Situation Industry Capacity (in GWp) Installation/Demand 6 Cells/Modules 13 2008 Wafer 10 Silicon • Great excess capacity in the 5 industry until at least 2011 Installation/Demand 5 • Technology prices are under pressure Cells/Modules 19 2009 • Marginal revenues go Wafer 16 „downstream“ to project Silicon 9 developers and investors • Starting 2011, global demand Installation/Demand 8* will rise dramatically (high Cells/Modules 23* elasticity of demand) 2010 Wafer 18* • For 2010 and 2011 ideal Silicon 14* market conditions for investments in solar farms Installation/Demand 15* Cells/Modules 25* 2011 Wafer 21* Silicon 18* * Analyst assessments; Source: Q-Cells, Jefferies&Company, SUSI Analysis Note: The market for wind turbines looks similar 20
  • 21. Back-up Crisis Allowed for Additional Returns for Down-Stream Investors Wirkungsgrad1 Entwicklung der Modulpreise2 Einspeisevergütung3 €/Wp €-cent 19% 3.5 50 17% 3.0 40 15% 2.5 13% 2.0 30 11% 1.5 20 9% 1.0 7% 0.5 10 5% 0 0 1995 2001 2003 2005 2007 2009 2011 2007 2008 2009 2010 2007 2008 2009 2010 2011 2012 2013 Europa China Entwicklung Marktpotential Solar Deutschland 120% 100% 80% Zusatzrendite nach Krisenbeginn 60% 40% 20% 0% 2007 2008 2009 2010 Einnahmen indexiert Kosten indexiert 1) Für Module aus Silizium (Monokristallin); Quelle: U.S. Department of Energy 2) Quelle: pvexchange.com 3) Für Deutschland, Dachanlagen ab 100kW bis 1MW; Quelle: Deutscher Solarverband
  • 22. Appendix Diagram LUX SICAV/SIF Fund Structure Board of Directors (LUX) Investors Sustainable „SUSI Sustainable Euro SUSI Partners AG (Zurich) SARL Fund“; SICAV/SIF LUX Fund Advisor (General Partner) (Limited Partner) SCA structure Advisory Board SUSI Sustainable Energy (to profit from the Double SOPARFI Taxation Treaties) (SPV) Investment Investment Investment (e.g. Solar Farm SPV) (e.g. Wind Farm SPV) (e.g. Solar Farm SPV) 22
  • 23. How can a renewable energy infrastructure fund be securitized? Method 2 1 SUSI-Partners EQUTIY SUSI SPV – CDO Tranches DEBT 2 3 Credit CLASS A+ protection payment Protection CLASS A seller Premium (Intermediary) CLASS B Class Rating (S&P)* Percentage of Debt Amount Interest Rate Cost of Debt A+ (1-5 Years) AA 30% 120 4% 4.8 A (6-11 Years) A 60% 240 6% 14.4 B (12-18 Years) BBB+ 10% 40 7% 2.8 Bank 100% 400 5.50% 22 Citigroup A 5.38% Acelormittal BBB- 5.25% Barclays AA- 5.20% Time Warner BBB 4.88% HSBC AA- 4.63% Hypothesize – for discussion purposes only. *S&P Debt Rating Criteria for Energy, Industrial, and Infrastructure Project Finance http://www2.standardandpoors.com/spf/pdf/fixedincome/SP%20Debt%20Rating%20Criteria%20for%20Energy%20Industrial%20and%20Infrastructure%20Project%20Finance%20March%2019%202001.pdf 23