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Private equity seen as less likely source of capital for renewable developers

Aword of advice for upstart renewable energy developers looking to grow is totake on the bulk of upfront project costs, avoid leaning too heavily onavailable private equity capital and generate some cash on your own, accordingto a group of established developers and financiers.

Forwhat private capital is available in the market for early stage developmentprojects, the views of seasoned developers and major investors in obtainingthat capital appears largely the same: first put skin in the game, then masterthe operations side.

Executivesfrom developers Sustainable PowerGroup LLC, Apex CleanEnergy and LincolnClean Energy LLC, along with investment outfits like and LSPower Group suggested that newer developers are better off usingtheir own balance sheets early on, before looking to tap private equityinvestors, if at all.

"Ifyou need money from private equity, I think you are in trouble," HannonArmstrong CEO Jeff Eckel observed Sept. 28 on a call hosted by Chadbourne &Parke LLP. "If you cannot find a way to bootstrap your way into thedevelopment business, at the end of the day, the nut you have to cover on aprivate equity deal, given the inevitable delays in development, makes it verychallenging for management teams on the developer side to make any money."

Evenif a developer can bootstrap upfront capital costs, and reach the point whereprivate equity capital could be tapped for growth, the implicit opportunitycost of that could be a loss of control, and that could hamper a developer'sability to play in a variable rate environment.

"Thelonger you can hang out without diluting yourself, the better your chances areof building a successful and sustainable business, because the dilution andlimitations on your control will ultimately adversely impact your ability togrow your business," LS Power Chairman Mike Segal said.

Present-dayreturns on development-stage projects around 14% to 16% might not be enough tolure some private equity investors, like LS Power, who would alternatively seekto acquire undervalued existing projects, rather than taking on exposure todevelopment risks and the prospect of sunk costs.

"Iwould not invest in a development stage project for a 16% rate of return, thedevelopment process risks would not justify, in my mind, the rewards associatedwith mid-teen returns," Segal noted.

Butfor developers with enough capital on hand, the development stage segment of aproject is precisely where recycling cash creates a growth opportunity, particularlyif management can manage risks adequately, and bring an operational project tomarket.

"Itis exactly that delta we are trying to capture, and we would rather not invitepartners in at that stage," Apex Chairman and Chief Strategy Officer SandyReisky said.

Andso that perhaps may leave prospective investors looking at development stageprojects in a commercial quagmire, because those successful developers nowappear to have capital on hand to take projects through to completion, and canlikely leverage their access to tax equity and project finance lenders tosmooth out a capital stack.

"Asa capital provider now, you only want to give money to people who do not needit — sad fact — but that is the way it works," Eckel said.