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Enterprise Value Cheat Code - Don't Sell Your Projects!

Development platforms that hold on to projects can multiply enterprise value by up to 12x!



Earlier this year, we published a post detailing some of the challenges commercial solar developers face, and how these challenges often force these developers to sell. As we approach the middle of the second quarter, this phenomenon persists. C&I developers often face a tough choice: sell projects for immediate liquidity or hold them to build long-term enterprise value. In this post, we reconnect with our friend Donnie the Developer to explore the pros and cons of this decision.

 

Developers that sell projects are able to capture a material gain on their work. Purchasers are typically willing to pay a 20% premium to EPC costs (sometimes called a development fee or market-up) to acquire projects. This provides originating developers with a major liquidity event, clearing any development financing and ideally creating a dividend for the developer. This is an attractive option in the short-term. However, this approach is less accretive to long-term enterprise value. When developers hold onto their projects, they create enterprise value by building a portfolio of long-term, revenue generating assets on their balance sheet. Depending solely on the income from selling projects makes a development platform vulnerable to market fluctuations. While the market may be favorable today for PPAs that you negotiated over the last 8 months, it may not be true for PPAs that you’re negotiating today and plan to sell 8-12 months from now.

 

Donnie Developer has historically focused on selling projects, favoring the influx of liquidity that can rapidly be recycled into new projects. However, rising interest rates, cost inflation and other market influences are making it harder to find buyers. This is straining Donnie’s balance sheet, as maturities come due amounts borrowed to fund development.

 

If Donnie Developer shifts to holding onto projects, he could create significant enterprise value. Green Energy companies see EBITDA valuation multiples of approximately 12x This means that each $1 in project (or portfolio) free cash flow creates up to $12 in enterprise value for the sponsor. There is an added benefit: the more proejcts that Donnie chooses to own, the stronger his balance sheet becomes, reducing friction in securing new financing.

 

In the current market, choosing a balanced strategy enables developers to enjoy stable, recurring cash flows while also capitalizing on market opportunities, ensuring they don't sell their future short. Sponsors should evaluate their access to flexible, commercial financing that will enable them to own their projects. Energetic has helped many sponors navigate the complex web of possible liquidity solutions – reach out to learn more.

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