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Transcript of Tobias reichmuth
Sustainable Infrastructure Financing:
Investing in Renewable Energy Infrastructure -
Private Equity Funds vs. CDOs?
TBLI Conference Europe 2010November 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: [email protected]
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
3
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
Introduction SUSI Partners AG
A Truly Sustainable Fund Advisory
4
Global Warming
Electricity need is raising
Groundwork Laid for Renewable Energy Funds
Global Warming and Energy Dependence Call for Renewable Energy
• 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
5
How Does a Renewable Energy Infrastructure Fund Work?
Example Solar: (Radiation x Feed-in Tariff ) – Cost = 14-17% ROE
• 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
€ 0,42 / kWh1
Feed-in tariff
guaranteed
by the
government
Capital
Total investment: € 7„431„202
Equity: € 1„114„680
Debt: € 6„316„521
Revenues
Solar radiation: 2„083„951 kWh
Turnover p.a.: € 875„259
(=2„083„951 x € 0,42)
Cost
Operating cost p.a.: € 74„858
Land-lease: € 34„000
Interest/amortization p.a.2: € 561„665
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.
1) Depends on FIT agreement vintage year and country2) 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 debt4) 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
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
77
SUSI Sustainable Euro Fund
Focus on Solar-PV and Wind Onshore: High Diversification Strategy
Germany
Italy
Belgium
France
Geographical
diversification
Solar
Wind
Technical
diversification
Operational
Turn-key
Diversification along
the value chain
Solar Wind23% 23%
23% 31%
50% 50%
80%
20% 100%
88
SUSI Sustainable Euro Fund
Value Creation: Focus on Turn-Key and Operational Projects
Example:
2MW wind
park
Example:
1MW solar
roof park
Return on
equity p.a.:
15-25%
Return on
equity p.a.:
15-25%
Return on
equity p.a.:
20-30%
Return on
equity p.a.:
20-30%
Return on
equity p.a:
10-20%
Return on
equity p.a.:
10-20%
SUSI Investment
SUSI Investment
Low risk
Moderate risk
High risk
9
Why is a Renewable Energy Infrastructure Fund Most Probably the Best
Investment Opportunity in the Current Environment?
2005 2010
Renewable Energy Infrastructure Sample Portfolio
S&P 500
DJSI (Dow Jones Sustainability Index)
Swiss Federal 10 Year Bond
Correlation Matrix
(quarterly IRR calculation)
2005 2010
• 10-14% annual return
• Minimal correlation
• Low risk
• Truly sustainable
• Transparent
…is currently hard to beat.
Absolute Return (indexed to Dec. 1, ‟05)
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
10
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
SUSI Sustainable Euro Fund
Summary
SUSI-PartnersEQUITY
Bank
DEBT 80-85%
Bank„s Pool of
SUSI-Partners
Project Finance
Loans
Protection
seller
(Intermediary)
Senior Credit
Default Swap
Provider
Special
Purpose
Vehicle
(Issuer)
CLASS A+
CLASS A
CLASS B
CLASS C
CLASS D
CLASS E
Credit
protection
payment
Premium
Premium
Credit
protection
payment
Cash
proceeds
from notes
Cash
proceeds
from notes
Interest and
principle
Interest and
principle
Certificates of
indebtedness
1
How can a renewable energy infrastructure fund be securitized?
Case Study
111111
CDO Tranches6
4
5
2
3
• 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
1212
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
13
Thank You For Your Attention!
SUSI Partners AGTobias Reichmuth
Fraumünsterstrasse 11CH - 8001 Zurich
SwitzerlandTel: +41 43 497 26 10
Fax: +41 43 497 26 11Email: [email protected]
1414
Currency Euro
Management fee2% (on committed capital during the commitment period of 30 months after first closing and on
the afterwards invested capital)
Service fee0.25% (on committed capital during the commitment period of 30 months after first closing and
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
SUSI Sustainable Euro Fund
Fund Terms
Back-Up
Exit Strategy: Significant Upside Potential
Project Exit
SUSI Sustainable Euro Fund invests in solar and wind
parks which profit from feed-in tariffs for 20 years
guaranteed by the government. The Fund‟s term is 7
years; therefore, for any project exit the potential buyer
profits from…
A) operational projects which produce electricity,
B) a 7 year project track record, and
C) projects that benefit for another 13 years of
“guaranteed” turn-over
Already now, the minimal market price after year 7 can be
determined by use of the DCF-method.
For the project discussed (solar park France, equity €
1‟110‟000) and provided that the debt amortization is
based on an annuity credit, an exit value after 7 years of
operation will be € 1‟380‟000. This allows a double-digit
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.
Further-on, the Fund profits from a portfolio premium
when exiting projects.
1) Return after cost, tax, and interest payments equals € 180‟000 p.a.2) Debt amortization of annuity credit3) 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%
Inve
sto
r a
fte
r ye
ar
7S
US
I In
ve
stm
en
t
Investment year 1
Total investment: € 7‟430‟000
Equity: € 1‟110‟000
Debt: € 6‟320‟000
Returns year 1-7
Total returns1: € 1‟274‟000
Debt amortization2: € 1‟772‟000
IRR3: 16.40%
Investment year 8
Total investment: € 5‟928‟000
Equity: € 1‟380‟000
Debt: € 4‟548‟000
Return year 8-30
Total returns: € 3‟695‟000
Debt amortization: € 4‟548‟000
IRR: 10%
An external investor will pay up to € 5’928’000 for
the this project after year 7. The SUSI equity (€
1’110’000) will be covered to 124% by the investor
(project equity price € 1’380’000 with 10% IRR).
15
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
Note: Similar process for wind parks; slightly different process for operational power plants
1. Project Due Diligence
• Radiation survey
• Verification of all permits (incl.
checks with local authorities)
• Verification of counterparty for
land lease/purchase
• Adequacy of technology for
micro climate
• Financial modeling, exit
options, preliminary tax
analysis
• Double checking of analysis by
debt partner
• Recommendation to Investment
Committee
2. Investment Committee /
Industry Experts
• Critical due diligence on market,
developer, project level
• Review of used technology
• Double-check all permits
• Recommendation for local due
diligence
3. Local Due Diligence
• With local partners (lawyers,
technical, tax experts, etc.)
• Double checking all contracts,
permits, etc.
• Micrositing, contacting local
authorities, grid operator, land
owner, general contractor
4. Unanimous
Recommendation
• Investment Committee to
Fund BoD
SUSI Sustainable Euro Fund
Due Diligence Flow Chart (Solar): 4 Stages Ensure Project Quality
16
Technology
• Excess capacities;
technology prices
down by 30% in 1 year
• Mature technology
• Buyer‟s market in
2010-2012
• Downstream value
creation
Market & politics
• € 1‟000bn. investment
planned worldwide
• Established markets
(Germany, France,
Italy, Belgium, Spain)
• From subsidized to
sustainable markets
• Broad political support
Globally
installed
MWp in
Solar p.a.1
Techn. DemandTechn. Supply
Electricity demand
• Need for energy
independence
• Strong trend to
electrification
• Generally rising
electricity demand
• Higher cost of fossil
fuel due to CO2-tax/
supply shortage
Projects
• “Off the shelf” projects
with attractive pricing
• Operational power
plants on the market
• Project developer with
substantial experience
• Buyer‟s market
• Attractive debt rates
1) The Spanish government surprised many developers by placing a sudden block on new solar projects in SpainNote: for wind energy a very similar situation applies
Sustainable Investments, Business Model, Market
Market Environment: Ideal Time of Entry (e.g. Solar)
• 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
17
2000
0
12„000
6„000
2005 2010 2015
Financial
Crisis/
Spain
Effect1
18„000
18
Back-up
Risk Management: Risk Avoidance on all Levels
Construction
• Experienced general contractors
• Payment after completion and
grid connection
Fund
• Well-established partners;
external NAV calculation
• Asset backed; very low exit risk
• High diversification
Project
• Turn-key or operational
• Project developers with local
experience
• Proven technology
• Tax optimization1
External factors
• Very low correlation to other
asset classes
• Strictly ecological
• Loss-of-use insurance
Management
• In-house competencies
• Adequate lead time
• No key man risk
• Industry experienced Investment-
Committee
Market
• Government guaranteed feed-in tariffs
• Focus on developed markets (Germany, France,
Italy, Spain)
• Only Euro investments
1) Please consult page 31 to learn more about the tax optimization strategy.
19Source: EU Comission 2010
Back-up
EU With a 20% Renewable Energy Target For 2020
in %
EU target overall (2020)
v
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.
EU target per country (2020)
Today
Italy
Spain
France
Germany
2020
Back-up
Industry Forecast: Solar Industry Offer/Demand Situation
5
10
13
6
Silicon
Wafer
Cells/Modules
Installation/Demand
2008
Silicon
Wafer
Cells/Modules
Installation/Demand
2009
Silicon
Wafer
Cells/Modules
Installation/Demand
2010
Silicon
Wafer
Cells/Modules
Installation/Demand
2011
9
16
19
5
14*
18*
23*
8*
18*
21*
25*
15*
Industry Capacity (in GWp)
* Analyst assessments; Source: Q-Cells, Jefferies&Company, SUSI AnalysisNote: The market for wind turbines looks similar
• Great excess capacity in the
industry until at least 2011
• Technology prices are under
pressure
• Marginal revenues go
„downstream“ to project
developers and investors
• Starting 2011, global demand
will rise dramatically (high
elasticity of demand)
• For 2010 and 2011 ideal
market conditions for
investments in solar farms
Back-up
Crisis Allowed for Additional Returns for Down-Stream Investors
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
Wirkungsgrad1Einspeisevergütung3Entwicklung der Modulpreise2
Entwicklung Marktpotential Solar Deutschland
120%
100%
80%
60%
40%
20%
0%
Zusatzrendite nach Krisenbeginn
2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 20101995 2001 2003 2005 2007 2009 2011
2007 2008 2009 2010
19%
17%
15%
13%
11%
9%
7%
5%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
50
40
30
20
10
0
€-cent€/Wp
Europa China
Einnahmen indexiert Kosten indexiert
222222
Appendix
Diagram LUX SICAV/SIF Fund Structure
Investors
Investment
(e.g. Solar Farm SPV)
Investment
(e.g. Wind Farm SPV)
Investment
(e.g. Solar Farm SPV)
SUSI Partners AG (Zurich)
Fund Advisor
Sustainable
SARL
(General Partner)
SCA structure
„SUSI Sustainable Euro
Fund“; SICAV/SIF LUX
(Limited Partner)
SUSI Sustainable Energy
SOPARFI
(SPV)
Board of Directors (LUX)
(to profit from the Double
Taxation Treaties)
Advisory Board
SUSI-PartnersEQUTIY
CLASS A+
1
How can a renewable energy infrastructure fund be securitized?
Method 2
232323
CLASS A
CLASS B
Protection
seller
(Intermediary)
Credit
protection
payment
Premium
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%
2 3
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
SUSI SPV – CDO TranchesDEBT