英文投行案例分析报告

E4D Case Study: Part A Imperial College Business SchoolUK Green Investment Bank – Case StudyPublic-Private Investment PartnershipsNew models in renewable energy financeJanuary 2015UK Green Investment BankAbstractThe UK Green Investment Bank (UKGIB) became operational in October 2012, supported by ￡3 billion (approximately $5 billion) of government money. As part of a multifaceted climate change strategy enacted by the United Kingdom, the bank wasfounded with a m ission of “accelerating the UK’s transition to a more green economy,With anand creating an enduring institution, operating independently of government”. experienced, professional management team in place, the UKGIB's immediate taskate sector funding on new large-scale clean energy infrastructure.was to ‘crowd in’ privBut while the strategic mandate for the bank was clear, a series of tactical issues remained about how to select new investments and manage its growing investmentportfolio. For instance, how would the team be able to manage conflicting public andprivate interests? What specific type of investments would best counter market scepticism about the renewable energy projects? Most importantly, what investmentevaluation framework would enable them to deliver on their vision of being both ‘greenand profitable’？This case was prepared by Christopher Corbishley and Charles Donovan. The authors acknowledgethe support of the UK Green Investment Bank staff for their invaluable assistance in gathering thematerial for this case study.This case is for educational purposes and is not intended to illustrate either effective or ineffective management of an organisational situation. The situations and circumstancesdescribed may have been dramatized or modified for instructional purposes and may not accurately reflect actual events.This case study is provided free of charge under an Attribution-Non-commercial-No-DerivationsCreative Commons licence. You may download this work free of charge and share it freely. The casestudies may not, however, be changed in any way or used commercially.Motivations for a Green Investment BankFollowing the enactment of the Climate Change Act of 2008, the United Kingdommade a legal commitment to significantly reduce its carbon emissions by 2050 and togenerate up to 15% of energy from renewable sources by 2020. To meet these goals,a committee established by the UK House of Commons estimated that between ￡200billion and ￡1 trillion of new investment would be needed over the next two decades. Traditional sources of capital for green infrastructure were thought to be able to provide no more than ￡80 billion over this period.The analysis presented a serious investment shortfall, a situation exacerbated by theglobal financial crisis. New European guidelines would put large commercial banksunder immense pressure to reduce the size of their balance sheets. The perceivedrisks associated with renewable technologies meant investments into green energy infrastructure were falling dramatically (Figure 1).Figure 1: UK Renewable Energy Investment by segment (￡bn)Source: UKGIB Annual Report 2013/14A series of influential reports subsequently observed a ‘market failure’ in the renewable energy sector, and hence advocated the creation of a state-backed infrastructure bank. Despite additional austerity measures sweeping across a number of government departments, after the 2010 general election the government budget contained the.first mention of a ‘green investment bank’By 2011, plans were set out for the activation of a Green Investment Bank in threephases (see Appendix 1): (i) Incubation within the department of Business, Innovation& Skills and the first direct financial investments by the UK government into the green economy; (ii) Establishment of the UKGIB as a stand-alone institution by 2012, and(iii) Commitment of full borrowing powers by 2015-16 "subject to public sector's net-debt falling as a percentage of GDP"."This is a big advance, the first investment bank in the world dedicated to greeningthe economy. It's a great achievement and an example of how the Government isworking together with the private sector to get big, long-term projects off the groundin a way that leaving it to the pure, free market can't do.”UK Business Secretary Vince CableOn 27 November 2012 the UK Green Investment Bank was established pending-approval from the European Union (EU) that its operations were not considered ‘anticompet itive’under state-aid regulations. Approval was granted soon after on the basis, which isthat the GIB’s lending and investment activities be “additional to the market”investors from the private sector, distortingto say the Bank must avoid “crowding out”　existing markets or conferring any unfair advantage on certain market participants.Unique from most government initiatives, the GIB was required to work on aRather than providing grants,commercial basis, to be both ‘green and profitable’.regional assistance or one-off development loans, its purpose was to “crowd in” private. Thiscapital into renewable energy investments, as opposed to “crowding them out”occurs when public sector spending either replaces or drives down private sectorinvestment as a result of the government providing a good or a service (such asfinancing) that would otherwise be a business opportunity for the private sector. Aspart of this, the Bank was mandated to focus 80% of its activities on four priority sectors: Offshore wind,in which the market was perceived to have ‘failed’. These includedenergy efficiency, waste recycling and energy from waste.The UK’s Green Investment Bank model differs somewhat from its European counterparts, such as Germany’s much larger KfW bank, described as ‘the largest IFI and the European Investment Fund, which predominately providesin the world’　guarantees. It differs in its remit specifically to address a market failure in the ‘gre sector, as well as its obligation to be profitable. The GIB model has since become abeacon in other developed countries. In 2013 the New York Mayor, Andrew Cuomowith theannounced $210 million in initial capitalization for the ‘New York Green Bank’　aim eventually to hit a target $1 billion capitalization.Structured as a Public Limited Company (PLC) 100% owned by the UK Government,the GIB’ｓArticles of Association ensured it would maintain total operational independence, (see Appendix 2) representing a new form of public private partnership(PPP). Vested with ￡3 b illion of taxpayer capital, and the ability to structure greenenergy investment products across the capital structure, (from senior debt to equity),the bank was tasked with the execution of a critical government policy, one meant toensure the UK’s energy future needs were met.Renewables: The ‘Ugly Duckling’ of Infrastructure FinancingAs part of meeting its state aid mandate, the Bank was initially focussed on definingit was designed to address. Most assumed the failures were anthe ‘market failures’　inevitable cause of negative economic externalities, specifically the lack of a clearprice for carbon. This meant without intervention, the social costs of environmentalimpact were not borne by investors and the private sector, nor was the social benefitof more sustainable projects being captured or invested in.The global financial crisis had a profound impact on green infrastructure investment,as well as infrastructure financing more generally. Pressure from regulators, shareholders and governments to de-lever and de-risk made long-term financing aless attractive proposition for banks. The majority of risk came from what banks call. However, bank appetites to “maturity transformation” i.e. borrowing short to lend longhold long-term assets had diminished in favour of short-term financing due to the‘funding mismatch’ risk of financing longer-term project debt.Credit performance of infrastructure finance has previously been strong for the banks.Yet many commercial players were increasingly finding the cost of funding exceededthe margins on their books. This had become a particular problem in Europe, whichhistorically relied on a number of banks committed to long-term project financing. Inlobalcontrast to the ‘institutional’ structure of capital markets in North America, the gfinancial crisis had broken the European model of bank-led project financing, suggesting a new institutional structure was required for the UK.Tied to this was the fact that in a global economic environment of exceedingly lowlong-term interest rates, investment institutions needed to identify real (inflation protected) yields to match the quantum and maturity of their pension liabilities. Hencethe missing piece in this puzzle was the presence of new market infrastructure (i.e. the intermediaries and investment vehicles) that connected pools of capital with investment projects.Risks and uncertainties around clean technologiesInformation asymmetries and risk aversion have presented additional barriers to achieving higher levels of green infrastructure investment from private sector investors. As a relatively new industrial sector, there was not yet a historical trackrecord of financial performance upon which to evaluate risk and expected return. Inthe case of offshore wind there are countless risks both in terms of construction andoperations. Potential risks included adverse weather causing maintenance delays, themovement of foundations or array cable failures leading to construction delays, thelack of sufficient wind and technology risk associated with the corrosion of components. Such uncertainties were comparable to offshore oil and gas in the 1970sand 80s – a class of asset financing commercial banks has since become comfortablewith.Offshore wind plays a make or break role in the UK’s ability to hit its binding renewable energy targets. Forecasts of demand required to hit those targets demonstratepotential for generating sufficient electricity from renewables (Figure 2). However,supply from investor-backed developers willing to take on the construction risk suggested further encouragement was required to keep up with demand (Figure 3).Figure 2: Demand for Offshore Wind InfrastructureFigure 3: Supply Status of Offshore Wind Infrastructure ProjectsPolitical and regulatory hurdlesA number of regulatory hurdles exist in the broader European market where policy uncertainty and austerity measures have previously led to unplanned reductions in public-sector investments. For instance, retroactive changes in countries such as Greece and Spain have come close to destroying the market for green infrastructure investments. The withdrawal of support for wind energy in some countries contributedto heavy losses in the wind industry, casting doubt on the ability of suppliers to sustain themselves (Figure 4).Figure 4: Turbine Manufacturers’ Margins 2008 - 2012Source: Bloomberg New Energy Finance-It was originally conceived that the Green Investment Bank find its ‘additional, non distorting’ role through a market position in which it took “slightly too much of the ris for slightly too little of the return” on green infrastructure projects. This was envisagedin a world in which market failures - caused by information asymmetries and riskaversion - might cause the private sector to underestimate the potential returns ofgreen energy investments. Hence at first, it was proposed the bank should be agovernment-owned development bank that would own society’s “cost of capital”, thus making a real investment return, albeit a lesser return demanded by private sectorinvestors.A key question facing the newly established team of the Green Investment Bank wassubsequently how to accelerate a shift in perception about green energy investmentswhile earning a decent return for UK taxpayers.UKGIB’s Mission and Business ModelRather than acting as a “development agency”, such as the World Bank, the UKGIBteam saw its role in partnering with existing long-term investors and encouraging newones by being robustly commercial in its approach. Its mission of being “green and would ensure that investors could observe decent financial returns in theprofitable”renewable energy sector. Only in this way could the Bank change existing perceptionsand attract incremental capital into green infrastructure investments.The UKGIB’s ‘green impact’ is measured against five criteria:1. Reduce green-house gas emissions2. Improve efficiency in the use of natural resources3. Protect or enhance the natural environment4. Protect or enhance bio-diversity5. Promote environmental sustainabilityFigure 5: UKGIB’s Business ModelSource: UKGIB Annual Report 2013/14The Bank also has a financial bottom line, which is to say that it is unashamedly and. Financial returns are based on state aid rules, on unambiguously a “for profit” bankthe basis that they are always additional, but they are also based on sound financeand a commercial return. These principles are reflected in the expertise of theirbanking management team, who have been recruited from some of the world’s top institutions, as well as the Bank’s investment strategy and due diligence process. Inits articles of association, it is even determined ‘the GIB should plan to deliver a minimum of 3.5% annual nominal return on total investments after operating costs but (see Appendix 2).before tax’In order not to ‘crowd out’　private investments already taking place in the green economy, UKGIB’s priority sectors were selected on the basis that they were on thes to assist in the development ofcusp of being ‘mainstream investable’. Its mission waprivate sector markets in order that the bank’s role within them becomes redundant. For a project to be investable by the UKGIB it must fit all six criteria set out by the investment managers and signed off by the Chief Risk Officer through an internal review process:1. Fit within the state aid mandate in terms of specific ‘priority sectors’to every project. Developers must prove they cannot obtain2. Be ‘additional’funding elsewhere. Often the bank starts off as a cornerstone investor andcrowds in funding by articulating the investment story.3. Invest at market rate in order not to undercut competition. Funding must beprovided pari passu with other investors, or if the purpose is to feed stocksupply, it might involve taking equity in the project and then taking additionalrevenues on the basis it is signed off as conforming to ‘market economyinvestor principle’ (MEIP) rules.4. Conforms to the five green credentials outlined in its articles of association.5. Presents a suitable risk profile, which involves various models and forecasts,testing the assumptions for revenues, cost of delivery and cover ratio limits.6. Last but not least reputation is key, particularly the relationship with both theclient and the developer.To ensure the Bank would be profitable, it was made explicit that areas in which theUKGIB would not invest would include the provision of grants and regional assistance, subsidised debt or equity, high risk-lower reward, venture capital, development equityor lender of last resort. Instead four priority sectors to which 80% of the Bank’s investment capital would be dedicated would include offshore wind, waste/recycling,non-domestic energy efficiency and support to the Green Deal (Figure 5). The remaining 20% could then be committed to other green energy sectors, such as biomass, biofuels and transport, carbon capture, marine energy and renewable heat.Figure 5: Investment Strategy by Green Energy SectorSource: UKGIB Annual Report 2013/14 Creating the Investment FrameworkAn ongoing question for the Bank’s senior management was what level of return above 3.5% would legitimately reflect the opportunity cost of capital for investments in therenewable energy sector. The organization needed to adopt a financial framework forsetting project hurdle rates (i.e. the minimum internal rate of return (RRR) required tosanction a new investment).As a veteran in the investment banking community, Chief Risk Officer, Peter Knott wasfamiliar with the broad range of sophisticated analytical techniques for estimating project hurdle rates (see Appendix 3 for formulae provided by professional service firms). But to deliver on all aspects of the Bank’s m ission, he reasoned that the financial framework should adopt a relatively straightforward and transparent processfor setting discount rates. He knew that a good discount rate for a specific project should reflect two basic assumptions: the time value of money and an appropriate compensation for risk. But categorizing and quantifying investment risk for large renewable energy projects was proving to be challenging.Peter and his team wondered how they could quantify the risk factors involved in greeninfrastructure investments when making decisions based on a risk-adjusted rate ofreturn. On the one hand, they understood the attractiveness of infrastructure financingwas in its ‘dependability’　as an asset that delivers fixed returns, particularly debtfinancing which offered additional security in terms of repayment and less active management. On the other hand, risks to private participants were either demand riskin the case that consumption did not match expectations or political risk.Given that the UK government was legally committed to meeting 15% of energydemand from renewables by 2020, and that producer guarantees enjoyed cross-partysupport, are inflation-linked and typically run for 20 to 25 years, the investment risk foroperators was low. As an instrument of policy, the UKGIB carried little political risk.However, by coming in at the early stages of project investments, the team wasconcerned with construction risk and the potential for cost overruns, making developerdue diligence such an important part of the process.In order to calculate the hurdle rate for each project the team had to think carefullyabout how these risks would be quantified before they could proceed with theirinvestment decisions.Example ProjectsInvestment 1: Refinancing of a UK Offshore Wind Project – Rhyll FlatsRhyl Flats is a 90 MegaWatt wind farm located 8km off North Wales in which theUKGIB acquired a 24.95% direct equity stake from RWE AG for ￡57.7m. As one of thefirst investments, this represented a landmark step in supporting one of the Bank’core sectors (offshore wind). Its main aim was to develop a secondary market foroperating offshore wind assets, allowing the release of capital back to developers onthe basis that this could then be reinvested into other projects.Green Impact Financial Impact- Expected to provide enough clean, green electricity to power around 61,000 homes- Reduced reliance on imported gas - Helping to meet greenhouse gas emissions and renewable energy targets - Investment alongside Greencoat UK Wind Plc, first company to invest solelyin operating UK wind farms- GIB’s investment helped RWE meet its wish to sell a 49% holding- Investment will allow RWE to redeploy funding from the sale in further UK offshore wind developmentsInvestment 2: Wakefield Waste PFI ProjectDemonstrating the diversity of products it offers across the capital structure, the Bankalso provided ￡30.4m of senior debt funding to Shanks Group PLC to support a 250-year PFI waste contract with Wakefield Council. The loan was provided alongside three commercial banks to deliver essential funding to contribute towards recycling facilities, waste treatment and generating sustainable power. In terms of green impactit achieves annual landfill avoidance of 200,000 tonnes, helps to increase the localauthority diversion rate to 90%, increases its recycling rate to 52% and providespotential annual emissions saving of 33,300 tonnes of CO2e.Green ImpactFinancial Impact - Diversion of c.200,000 tonnes p.a. ofmunicipal solid waste from landfillhelping to increase local authority’s landfill diversion rate to 90% - Increase local authority ’s recycling rate to at least 52%, greater than UK ’s2020 target - Provide potential annual emissionssavings of approximately 34,300tonnes of CO 2e- GIB is providing senior debt and equity bridge facilities pari passu with three commercial lenders - GIB was invited to join banking club inmid-2012 providing necessary additionalliquidity to ensure achievement of financial close- Mobilised three times GIB investment Investment 3: Realm Energy Centres FundThe Bank has also committed ￡50m to the Aviva Investors REaLM Energy CentresFund, which provides long-term funding for public sector energy efficiency projects.The fund made its first investment of ￡36m (of which GIB contributed ￡18m) in anenergy centre project for Cambridge University Hospitals NHS Foundation Trust overa 25-year period. Technology includes a combined heat and power engine, biomassboilers, efficient dual fuel boilers and heat recovery from medical waste incineration.Green ImpactFinancial Impact - Expected CO 2e savings ofapproximately 8000 tonnes perannum - Reduce the Trust ’s overall energy bills by ￡20m over the 25 yearoperation of the project - Help the Trust achieve its 2020 carbon reduction goals- GIB ’s investment into the Fund has mobilised c ￡18m of private capital into the project from Aviva Investors REaLMInfrastructure Fund to support its first investment - GIB ’s full investment commitment of￡50m will eventually mobilise a total of at least ￡50m private capital into the sector The Greencoat Fund - Achieving ‘additionality ’ at a fund levelWith experience providing both debt and equity in offshore wind projects, the UKGIBworked with Greencoat to raise an offshore wind fund in 2013. Together, they hadrecognised a high level of demand amongst pension funds, sovereign wealth fundsand institutional investors wishing to be exposed to the sector but lacking theconfidence and closeness to the industry to make substantial investments bythemselves. By helping to assess the fund's prospects for investment from theDepartment of Business Innovation & Skills and taking a 25% equity stake in RhylFlats, one of the fund's seed assets, the UKGIB helped to get the fund off the ground.This also involved negotiations with the EU Commission and the FCA to explore thepossibility of establishing a fund management business, which would help crowd-inown balance sheet to work but by usingprivate investment, not by putting the Bank’ｓits exper tise in investing its own funds to manage other people’s money, channelling investment into green infrastructure projects. Based on the success of the GIB’s fir fund of this kind (having achieved returns of between 8-9% in its first year), it plans tolaunch additional funds and financial products in future.Taking the Next StepsOver the last few months, Peter had been approached by a number of companiesseeking equity and/or debt investments in offshore wind projects currently under development in the United Kingdom. Having carried out due diligence on each of theprojects and the developers involved, he has boiled down the UKGIB’s options to threepotential investments. Before proceeding, he asked his investment team to carry outthe following task:Taking into account the key risk categories for an offshore wind project,determine the weighted average cost of capital (WACC) for the threeoffshore wind projects.The selection of a project-specific WACC should take into account an expected capitalstructure for each project, the cost of debt, and the expected return on equity.Summary data captured during the due diligence process is provided in a separatespreadsheet, providing both qualitative and quantitative insights on the relative risksassociated with each project.Generate a one page investment memorandum that justifies your WACCfor each project, taking into account the Bank’s strategic mandate as wellas comparable commercial returns in the sector.Identifying the risk categories and WACC associated with each project will be helpfulfor Peter in future to understand the minimum acceptable rate of return, given eachproject’srisk profile and the opportunity cost of other investments. The weightedaverage cost of capital across a variety of related sectors is included in Appendix 3 asa benchmark for his investment team.Appendix 1: UKGIB Timeline’ｓArticles of AssociationAppendix 3: WACC Benchmarks。