For developers who want to “get fit” in the words of Brad Gerstner in his now famous letter to a certain tech CEO while escaping the doom loop, the obvious answer is to raise capital. For developers at different stages there are different paths to go down, but what we see very often are pitch decks seeking to win the Olympic gold medal in marathons before lacing up their first pair of running shoes. Continuing from the thread posted on June 10th, 2024, we know that renewable energy development is a capital-intensive and cash burn-heavy business with a lack of capital flowing into developers.
SCAF has supported and funded over twenty developers and funds over the last decade across Africa and Asia, which has provided valuable insights. In SCAF we are in the fortunate position where we firstly see a host of different strategies and projects and where we can start working with and financing developers throughout different cycles, from very early-stage new teams through to independent power producers (if they come with something very interesting).
So, what does “very early on” really look like? For us, we have broken down the developer maturity curve into four stages, from being the early developer with a small team and pipeline to becoming a regional powerhouse. Historically, we have backed lean, new teams with as little as three team members (assuming it’s the right skillset, track record and they have something intangible) with relatively immature pipelines and running on founders’ equity. Interestingly, the smaller, lean teams we have supported have gone on to be very successful. There are some noticeable trends we have seen in these teams over time as to some key success factors that make the teams go on to be successful – oddly, smaller capital raises are one of them.
What is curious during the earlier days of a developer’s existence and drawn from our experience, is that there are many developers who do not want to go the joint development agreement route or flip projects. Part of this is understandable, given the length of time it takes projects to be realized, the act of letting go can be a challenge. The other part of why we do not believe this is actively happening, is the value or lack thereof, placed on pipelines by investors – this is truer in the African markets over Asia and driven by a clear route to market and requires more of the team intellectual property (why building strong internal local teams are important).
For all developers further down the maturity curve, the majority wants to be in the position of taking their first project(s) full cycle from early development through to financial close. But at some point, after many years and dollars spent, what is better than the first full cycle project is momentum. Momentum that can be generated through a project exit to a larger player, or a larger player coming in at a later stage of development that can carry the initial developer over the finish line multiple times. This momentum puts the developer on a different step of the podium for investors and peers and acts as a validation that can see a faster shift up the maturity curve. We have seen the value of momentum recently with some of our partners and how they have used it to invigorate their teams while raising capital to sustain their development activities and raising the overall firm profile.
This initial momentum can create a seismic shift, however, it does not mean that the shackles of financial oppression have been taken off and developers still need to maintain a disciplined approach to development. From the bottom of the maturity curve to reaching the develop, own and, operate cycle, it requires different forms of capital, new investors, different skillsets in the team and the overall mentality and how you go about things. The mental shift, which is required involves several aspects, namely, longer-term time horizon planning, better risk management, added layers of corporate governance, and an asset management focus. Teams who have done this before are inherently better placed to manage this change and stay more focused. We have seen several developers lose financial discipline on the back of large capital raises and this has typically not ended well (either for management or the equity providers).
While we typically believe a more gradual shift up the maturity curve to be beneficial, it would be very difficult to tell someone to raise an initial smaller amount over bigger tickets. The rise of platforms that are getting large capital commitments at the onset while building teams and pipelines are changing the dynamics and creating greener eyes throughout. For platforms without the right team and / or mature pipeline, this creates an issue most investors are seeking to avoid by making direct investments and committing capital without it being drawn and having to fund large pieces of development capital and teams. We have seen several platforms seek to start their journey with an acquisition, but the reality is there are not many assets for sale at attractive valuations which makes it complex.
The question becomes, why encourage a gradual shift with smaller tickets when securing capital whether large or small is probably more important for cash-starved developers. There are several drivers behind our rationale: ensure continued focus on execution; stay lean and not build out unnecessary overheads; less dilution based on poor valuations; time spent on larger raises; and added complexity in governance.
While this paints an ideal world scenario, it is not the reality in the markets in which we operate. Given the lack of line of sight to financial close of projects alongside the valuation discrepancies – smaller more tailored financing solutions are the more optimal outcome for all. The only problem with such tailored solutions is that there are not many or providers of such solutions that are tailored to developers are most likely only to be found in more developed renewables and financial markets.
Sitting in the privileged position we do in SCAF, having supported multiple developers across Africa and Asia, we had the opportunity to look under the hood of many different developers across Africa and Asia and see which strategies have been successful. We do believe that the more gradual shift from a pureplay developer and moving through the different phases in a staged approach will lead to better long-term outcomes for the developers and investors behind the companies.
At the end of the day, what are the chances of succeeding in an ultramarathon before completing your first 5 km run?
