For Berkeley Energy’s latest Africa renewable energy fund, seven development finance institutions have committed €130m at sum.

According to Berkeley Energy, Africa Renewable Energy Fund II (AREF II) fund’s investor base includes CDP, CDC, FMO, Proparco, Swedfund, Sustainable Energy Fund for Africa and the Clean Technology Fund, part of the Climate Investment Funds.

AREF II has an ultimate target fund size of €300m. It will primarily target run-of-river hydro, wind and solar projects.

In addition, battery storage opportunities, across sub-Saharan Africa, excluding South Africa are considerable

Luka Buljan, managing director of Berkeley Energy, said: “The successful first close of AREF II sends a clear sign of confidence that our hands-on, asset-first, technically orientated approach resonates with our investors and makes a material difference for the communities in which we operate.

“Our track record of delivering projects and strong investment returns means we are well placed to serve Sub Saharan Africa’s growing demand for clean, affordable and reliable energy.”

AREF II follows the full deployment of the predecessor Africa Renewable Energy Fund, which invested in hydro, geothermal and solar projects in Sub Saharan Africa.

“I have never cared what something costs; I care what it’s worth,” says Ari Emanuel, co-CEO of William Morris Endeavor. 

M&A, which is one of the great aspects of the corporate finance world, is driven from creating more value as two separate companies together, compared to being on an individual stand. So to begin with, a successful acquirer should check the target firm’s profitability, growth rate, along with many other factors. 

According to J&P Morgan’s 2020 Global M&A Outlook, while 2018 was the year of megadeals, due to challenging regulatory environment and geopolitical uncertainty, the global M&A market slowed in 2019. Despite declines in announced M&A activity, strategic dialogue remained strong as companies continued to use M&A to strengthen their businesses.

Unfortunately, with an unprecendented period of 2020 and COVID19 pandemic, all the past data and M&A avtivity has been put to a stand. Inthese days, after the first shocks and affect, M&A market will be making a new pathway forward. 

As for the Turkey M&A market, according to Deloitte’s Annual Turkish M&A Review 2019, it is believed to be the poorest year since 2009. Total M&A deal volume in 2019 was around US$5.3 billion through 233 transactions, indicating a year-over-year decline of 56% and 9% in terms of deal volume and deal number, respectively. 2019 was characterized by a lack of big-ticket transactions and the lowest average deal size in the last decade. Despite delivering one of the weakest volumes historically, the total deal number was lifted to the past ten-year average by numerous early-stage M&As backed by venture capital firms and angel investors, making up 30% of the total annual deal number. Similarly as outlined above COVID19 pandemic will have further affects in the Turkish M&A market and related financings. 

Although the M&A market is on the downtrend, renewable energy is still at the top of mind for a variety of stakeholders, including strategic investors, financial sponsors, corporations, and governments. And M&A activity in renewables has been growing due to the demand for renewable energy. The global areas of M&A activity such as the acquisition of start-up companies developing emerging technologies for use in, or in connection with, renewable energy projects, acquisitions involving regional consolidation of energy services, and acquisitions of renewable energy services providers are increasingly attractive. As new technologies become more cost-effective and consumers continue to expect and demand more in the way of sustainability initiatives, strategic and financial buyers alike are still finding renewable energy projects and services to be attractive investments. Renewable energy projects remain also an important area for the Turkish Market.

While speaking of M&A trends, analyzing success and process, we should also consider that the sectoral develeopment, energy market state and funding sources create a difference between regions. As an example, while M&A activity in renewables is being driven by traditional energy businesses scrambling to acquire new capabilities and institutional investors looking for stable and predictable returns, in Turkey existing local players in the energy market drive M&A activity through value-driven purchases.

According to EY Power Transactions and Trends Q1 2019 report, clean energy deals continue to dominate the M&A universe, making up 56% of deal volume and 61% of deal value in Q1 2019.

Looking at the recent valuations and deals where Profistance Advisory is in discussions we can fairly say that the Turkish market has been reaching valuations around 12 EV/EBITDA for the renewables assets, that is further a question one being over-priced. 

The Renewable M&A valuations, in general, are affected by, electricity price – regulated or market, the risk premium for the discount rate and all the detail drivers for EBITDA accumulation. After the COVID19 we have seen 2 general lines in the Turkish market, one being the increase in risk premiums and the COVID19 effect to discount rates, secondly due to the global stop in all different sectors, the renewable energy with a stable YEKDEM price, caused investors to receive a well-generated cash flow. The changes in valuations have been transferred to the M&A discussions in the market, with sellers asking for a Premium on their sales prices before the COVI19 pandemic. The main risk issue is still seen as the price risk, with YEKDEM scheme under re-consideration in terms of methodology, currency and applicability along with the transformational changes in market energy prices to be modelled after COVID19

As before COVID19 the expectations and prospects and valuations have been positive, the COVID19 affected the deal volume and financial closes but not the long-term prospect of the market. Before COVID19 and its devastating effects, the M&A market was believed to continue its strength and competitive manner. Along with financial markets struggling due to COVID19 originating uncertainty and increased risk; re-evaluations, cancellations, postponements are rapidly increasing. Although we don’t know how much more time COVID19 will affect the sectors, and probably analyze and due diligence process will change, we believe that with renegotiations and goodwill, M&A deals can still be on track.

Increasing investment trend for Renewable Energy before COVID19 is to be believed to continue according to industry players. While banks are sounding negative, with little delay investors and advisors say they are positive to the sector just as before COVID19. Well-capitalized developers seem to access the funds they need as easily as before, reflecting strong demand for renewables assets. Last but not least, we also believe that the global increase in liquidity will create a room for opportunistic M&As with renewables having a positive outlook. In this prospect, it is important for investors to tap these opportunities, with suitable advisory companies, that are not only expert in renewables, energy market, technical due diligence, but also in financial arrangements, financing/funding of M&As and financial modelling for Renewable Assets both with conventional rule based models and machnine learning capabilities.

Footnotes:

1. https://www.jpmorgan.com/jpmpdf/1320748081210.pdf

2. https://www2.deloitte.com/tr/en/pages/mergers-and-acquisitions/articles/annual-turkish-ma-2019.html

3. https://www.ey.com/en_gl/power-utilities/how-demand-for-renewables-drives-m-a-activity

Authors

Özlem KILDIR
CEO
Profinstance
ozlem.kildir@profinstance.com

Sinem SIN OKUR
Project Finance Manager
Profinstance
sinem.sinokur@profinstance.com

The most critical financial services in the energy due diligence services is financial advisory and specially financial modelling, as causing a decrease in financing costs and optimizing the finance structure. Financial modelling plays a part in both investment decisions and evaluation. 

In project finance, financial model allows a project-specific calculation that demonstrates all cash flows and presents all the outstanding performance indicators. Financial models help financiers through indicating entire funding decisions, providing flexible functionality for funding, forecasting production amount, reviewing tax calculations, creating master scenario and optimizing the project. Another benefit of financial modelling is that it provides input to sensitivity analysis.

For renewable energy projects, focus of the financial modelling is unit cost of production. In this context, financial modelling ensures calculation of the unit cost with considering different conditions. Outcomes of this process help determining the lowest levelized cost of energy in certain conditions and constitute the base of a PPA. 

Financial models can be divided into two depending on the stage of use and the details of the model. It is important to form operational models after the financing is secured and financial close models to be updated. In Project Finance transactions in Turkey, the usual structure is to use project finance financial close models as is for future operational phases that cause problems in both the financing and operations of the plant. With this respect of experience and a recent article by Matthew Bernath we would like to dig deeper into these models, and how to manage the transition. Two financial models can be stated as: 

• Financial Close Model
• Operational Model

“The financial close model is a model that aims to raise capital, comprehend a deal and finally reach financial close. This model is useful for not only equity but also debt providers in terms of understanding project risks and sensitivities. This makes the model favourable for financial close and hedging process, in addition being a powerful negotiation tool. Construction and operations begin after the financial close. Financial covenants and ratios are considered to measure in order to interpret the project, because project starts to create revenues and incur expenses. 

Operational model advantageous for events that happen at operational phase such as refinancing and sell-downs. In addition, operational model is useful for equity holders as refinancing or additional gearing are deliberated. 

Both models are helpful in different phases of the projects. The most common problem in the renewable energy sector is to continue to use of the financial close model during the operational period without creating a separate operational model. To convert financial close model to an operational financial model, there are several points financiers should pay attention. 

Hard-Coding Inputs

Inputs which cannot be changed once Financial Close have to be reached are hard-coded. This may include sculpted debt repayments, hedged rates or sensitivities built into the model for running scenarios during the funding process. It should not be possible for future model users to change these cells or any other inputs that have been ’hard-coded’ and agreed to during Financial Close.

Make Changes Easy

Inputs that do require changes or to be updated during operation (wind data or power generated, sales etc.) can be changed very easily and the place in which these can be changed can be easily found because tracking changes helps illustrating the situation. Anyone responsible for updating the operational financial model should understand exactly what and where they need to update assumptions with actual figures when updating the operational model.

Handover Process

Have a proper handover process and training to ensure the model builder adequately explains how the model works and what will be changing now that the model is being converted to an operational financial model. In addition, it should be clear what key ratios and outputs equity and debt providers expect to see on an ongoing basis.

Covenants

Ratios and covenants should be clearly displayed as the bank will be particularly interested in monitoring these.

Functionality

Cash flow waterfall have to be still functional in the operational financial model – this will be key to ensure that ratios are correctly calculated, and the bank can assess cash flows.

Dashboards

Build in an operational dashboard that will be useful for management reporting. This dashboard will also show when key events can or should occur.

Operational Financial Model Audit

Audit the operational model to give management and the banks confidence in the model. While this might seem like overkill, auditing a model that will probably survive the length of the project – be it 17 – 25 years, is extremely worthwhile and an easy decision to make.

Making the Operational Financial Model ‘Decision-Useful’

Of course, the list above is not extensive. All complications of the certain transaction should be considered when transforming a financial close model to operational. Following the above list will be provided to move forward a model that can be used to monitor a project and is decision-useful. 

Ultimately – every financial model should be decision-useful, i.e. it should be a tool used for decision making of both an operational and strategic nature. A Financial Close Model that has successfully been transitioned into an Operational Model will be both operationally useful for management report, and strategically important for key project decision making.”

As a result the modelling differences and points to watch out is pointed above. As a practitioner advisory service firm in financial modelling it is critical for project owners and corporates to outsource modelling work to an independent advisory company. This independence from corporate structures and decision lines and day to day operations will prove a successful conversion to operation models from all set financial close models. 

References

• Matthew Bernath, “What is a Financial Close Model vs. an Operational Financial Model?”, 2019
• EIA Publication, Levelized Cost of New Generation Resources in the Annual Energy Outlook 2013 
• Ed Bodmer, Energy Financial Modelling, 2015 

Ozlem Kildir, Founder of Profinstance Project Finance Advisory Incorporation
ozlem.kildir@profinstance.com 
www.profinstance.com