When Danielle Patterson is asked about what’s involved in advising on renewable transactions, there’s no easy answer.
“Renewable M&A deals often involve a wide range of transactions and agreements, making them much more complicated than standard M&A deals,” Patterson said. “This is where M&A meets project development, meets private equity, meets project finance.”
“People are often surprised how many third-party consents are involved in these transactions and the amount of work it takes to obtain them, not to mention the amount of negotiation between the buyer and seller allocating responsibility and risk for obtaining or failing to obtain consents.”
She should know. A partner in V&E’s Energy Transactions & Projects practice, Patterson has been advising in the renewable energy field for the last decade. Over the years, renewable transactions have become an increasingly important part of her practice. Her clients include leading banks, financial institutions, and private equity firms investing in clean energy projects.
“We advise on investments at various stages,” Patterson said. “It could involve a developer working on an early-stage project who is seeking a buyer. Or it might be a joint venture arrangement where the developer and the investor put together a long-term agreement for the ownership of the projects. And we also see investments made in post-construction projects where investors are buying and selling aggregated portfolios of wind farms, solar farms, and other renewable technologies.”
Historically, investors have been drawn to clean energy because of the availability of tax credits. “But increasingly, we’re seeing investors getting into this space because it makes economic sense and because they’re focused on sustainable investments,” she said.
Patterson recently shared three ways renewable deals are different from standard M&A transactions. Here’s what she had to say.
The due diligence needed is far more extensive
A run-of-the-mill M&A transaction requires relatively straightforward due diligence of the target. In contrast, renewable M&A transactions require examining numerous entities.
“The diligence process is very intense, there’s a lot to cover,” Patterson said.
Due diligence begins at the asset level with an investigation of a renewable energy project’s financials, liabilities, revenue stream, and market position. Contractual obligations, such as power purchase agreements, shared-use agreements and EPC (Engineering, Procurement and Construction) contracts will also be probed.
Because renewable energy M&A deals often encompass a portfolio of renewable energy projects – such as 10 to 20 wind or solar farms – this asset-level investigation must be repeated to cover each individual project.
But that’s just the starting point. Many renewable energy projects have multiple tiers of ownership, each of which require due diligence.
Renewable projects often involve tax equity financing whereby an investor will provide capital in exchange for an allocation of tax credits generated by the renewable project. A tax equity joint venture is set up, which owns the project. Above these tax equity joint ventures might sit an upper-tier joint venture.
“You have to start at the bottom and understand the project and its risks, liabilities, and revenue streams,” Patterson said. “Then you have to go one level up and study any existing or future anticipated tax equity structures that are going to allocate economics, risks, and liabilities. And then you might have an aggregator or an investment vehicle above that.”
What’s the downside of failing to conduct proper due diligence?
“Renewable energy projects typically have a lower yield than other types of investments, so the margin for error is very slim,” Patterson said. “You’ve got to understand the economics, the cash flow, and the risks.”
Third-party consents are more involved
Understanding whether third-party consents are required is a standard part of any transaction. But it becomes a far bigger task in renewable deals.
Of particular concern are any tax equity joint venture partners whose consent might be needed when there is a change in ownership.
Other third parties whose consent might be necessary are parties to contracts with the projects being acquired. For instance, there might be certain approvals needed from off-takers – the purchasers of the energy generated by the clean energy project.
“People are often surprised how many third-party consents are involved in these transactions and the amount of work it takes to obtain them, not to mention the amount of negotiation between the buyer and seller allocating responsibility and risk for obtaining or failing to obtain consents,” Patterson said.
Structuring a renewable deal requires careful consideration
In structuring renewable energy deals, particularly for development stage projects, the focus isn’t just about the transaction at hand, but also about transactions down the road.
Specifically, parties in renewable M&A want to ensure that they will have the flexibility needed to monetize their investments. That means minimizing any change-of-control or transfer restrictions now, rather than facing those roadblocks later.
At some point in the future, an investor in renewable energy projects might want to bring in additional equity or financing.
“If you want to bring in cash equity, tax equity, or debt financing, or if you want to sell a project, you want to be able to do that without going back to any third party,” Patterson said. “You will want to pre-bake these consents in as many transaction documents as possible.”
Want to learn more about how renewable M&A is different from traditional M&A? Watch this webinar.