The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
Structuring Private Equity Funds
for Investment in Renewable Energy
Projects: A New Financing Option
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, JUNE 14, 2017
John J. McDonald, Partner, Troutman Sanders, New York
Justin Boose, Partner, Troutman Sanders, New York
Adam C. Kobos, Partner, Troutman Sanders, Portland & San Francisco
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-866-570-7602 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can
address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 35.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
STRUCTURING PRIVATE EQUITY FUNDS FOR INVESTMENT IN RENEWABLE ENERGY PROJECTS:
A NEW FINANCING OPTION
John McDonald
Partner
Troutman Sanders LLP
John.McDonald@
TroutmanSanders.com
Strafford National Webinar
June 14, 2017
Justin Boose
Partner
Troutman Sanders LLP
Justin.Boose@
TroutmanSanders.com
Adam Kobos
Partner
Troutman Sanders LLP
Adam.Kobos@
TroutmanSanders.com
A NEW AND CREATIVE STRUCTURE…
• The emerging trend of energy private equity (EPE) funds is revolutionizing the
renewable energy field, as renewable energy joins leveraged buyouts, venture
capital and hedge funds as asset classes that institutional investors and high net
worth investors are using to deploy their capital in a diversified manner, with the
added “social good” of investing in a sustainable energy future.
• Sophisticated energy sponsors are increasingly eschewing the traditional project
finance structure, in which capital stacks are created for each deal, in favor of a
private equity fund structure in which committed capital is deployed by the
sponsor in accordance with a specified investment strategy.
• From the sponsors’ perspective, the goal is the “holy grail” of all private equity
sponsors – permanent capital. This trend can be seen as further evidence of
renewable energy maturing as an asset class within the larger investment world.
• Since this trend is so new, the terms of EPE funds vary tremendously. However,
some common terms have emerged….
6
COMMITTED CAPITAL
• Committed Capital
EPE funds typically employ a traditional private equity fund structure in
which LP investors sign subscription agreements requiring them to make
capital contributions in response to capital calls issued by the sponsor to
fund investments made by the fund in accordance with the investment
strategy.
This contrasts with traditional project finance structure in which the sponsor
creates a project company for each investment and then sources investors to
provide equity capital for that investment (like the “fundless sponsor” LBO
model).
U.S. renewable energy “tax equity” investments are still predominantly done
utilizing the traditional project finance structure, rather than a committed
capital structure.
7
INVESTMENT STRATEGY; CARRIED INTEREST
• Investment Strategy
EPE funds are typically focused on investments in a particular sector –
renewable energy, waste-to-value, etc. – and consent of a majority-in-
interest of the LP investors (or, less frequently, the LPAC) is required for the
fund to make deviating investments.
• Carried Interest & Management Fees
Carried interest and management fees in EPE funds vary significantly based
upon relative negotiating strength of the parties, which is often a function of
the sponsor’s track record and the sophistication of the LP investors.
Some EPE funds employ traditional “2&20” private equity fund structure, in
which the sponsor receives a 2% management fee on committed capital
(stepping down to apply to invested capital once it is deployed), along with a
20% “carried interest” share of the profits on investments made by the fund.
8
DISTRIBUTION STRUCTURE
• Distribution Structure
Waterfall distribution structures vary considerably across EPE funds, but
many employ a traditional private equity distribution structure in which the
LP investors receive back their invested capital, plus a preferred return on
that invested capital, and then the profits are split.
Profit are split between the LP investors and the sponsor in accordance with
the traditional 80/20 “carried interest” split ratio. This “hard pref” approach,
in which the split is only of the excess over the pref, is commonly used in US
real estate private equity funds.
However, as with US LBO funds, there is sometimes a “disappearing pref”
structure in which, once the LP investors receive back their invested capital
plus the preferred return, there is a “GP catch up” so that all profits in excess
of invested capital are split 80/20 between the LP investors and the sponsor.
9
DISTRIBUTION STRUCTURE (cont.)
• Distribution Structure (cont.)
Sometimes the fund economics are structured to mirror the traditional
project finance waterfall structure by providing for the profit split among the
sponsor and the LP investors to occur on an investment-by-investment basis.
If an investment-by-investment approach is used, there will typically be a
“clawback” to the extent that doing so results in the sponsor receiving
proceeds in excess of agreed-upon 80/20 profit split as a result of early, very
profitable investments followed by losses. Payment of the carry to the
sponsor is sometimes deferred or the funds are escrowed.
However, sometimes the 80/20 carried interest split of profits occurs on an
aggregate basis across all investments made by the fund and the sponsor
only receives its portion upon liquidation of the fund’s last investment.
The aggregate approach is consistent with that commonly used by European
private equity funds.
10
FUNDRAISING PERIOD
• Fundraising Period
EPE funds typically employ the traditional private equity fundraising
structure in which an initial closing occurs and subsequent closings in which
additional LP investors commit their capital to the fund occur over 6-18
months thereafter.
However, for EPE funds making “tax equity” renewable energy investments,
it is often not possible, due to tax law limitations relating to pass-through of
the tax credits flowing from the underlying investments, to use a fundraising
structure in which there are subsequent closings in which new LP investors
retroactively participate in investments made with capital provided by initial
closing LP investors.
As a result, that EPE funds making “tax equity” renewable energy
investments typically have one closing, in which all of the LP investors
commit to invest their capital.
11
INVESTMENT PERIOD
• Investment Period
In EPE funds that provide capital to construct renewable energy facilities that
will, upon completion, be sold to long-term investors, the fund’s investment
period often follows the approach customarily used in private equity funds.
In those types of funds, there is a stated investment period, in which the
fund sponsor identifies investment opportunities, calls capital from LP
investors to make the investments, and the capital is used to construct the
facility.
Upon completion of the facility, cashflow from the facility and sometimes
sale proceeds from sale of the facility, are used to repay LP investors. Upon
realization of all investments made by the fund, it is liquidated.
However, the investment period can vary considerably for EPE funds making
other types of renewable energy investments, including those that invest in
completed projects.
12
INFORMATION RIGHTS
• Information Rights
EPE fund investors typically receive the following information from the fund
sponsor:
- Quarterly and annual financial statements, with the annual financial
statements often being required to be audited
- Form K-1s and other documents necessary for investors to complete their
tax filings
- Annual reports to investors summarizing the fund’s performance
In addition to receiving the documents listed above, EPE fund investors
typically have the right to inspect the fund’s books and records and
sometimes have the right to meet with the sponsor to discuss fund
performance.
13
REGULATORY ASPECTS
• Regulatory Aspects
Like other private equity funds, energy private equity funds are required to
comply with federal and state securities laws:
- The Securities Act of 1933
- State Blue Sky laws
- The Investment Advisors Act of 1940
- The Investment Company Act of 1940
14
CONCLUSION
• Conclusion
In conclusion, there can be no doubt that renewable energy transaction
structures are evolving as sponsors move away from the traditional project
finance model of constructing a capital stack for each project, which they
view as inefficient and wasteful.
Instead, sponsors are increasingly moving toward a committed capital
structure in which LP investors have a streamlined way to deploy capital
across a portfolio of renewable energy assets selected utilizing a specified
investment strategy.
This trend could help transform the way in which renewable energy projects
are financed and lead to further growth in the use of renewable energy.
15
QUESTIONS?
16
John McDonald
Partner
Troutman Sanders LLP
(212) 704-6234
John.McDonald@
TroutmanSanders.com
Justin Boose
Partner
Troutman Sanders LLP
(212) 704-6349
Justin.Boose@
TroutmanSanders.com
Adam Kobos
Partner
Troutman Sanders LLP
(503) 290-2321
Adam.Kobos@
TroutmanSanders.com