How to Get Into Project Finance?
To get into project finance one must have the knowledge of accounts and finance (CPA or MBA in finance) who have experience in infrastructure project with analyzing and preparation of cost models including comparison of costs and revenue and can determine project viability in terms of profit with all the knowledge of generating finance from banks and best application methods.
If you have decided to build a career in project finance, you’re at the right place. In this article, we will talk about how you can get into project finance in detail. Due to global financial crises, the paradigm has been shifted in project finance and the liquidity has been drastically reduced. But there’s hope. And you can still build a career of your likings. And reading this article would definitely help.
Without much ado, let’s get into the meat of the article.
What is Project Finance?
You may have heard about the term “project finance” in business articles or newspapers, but may not have known the meaning of it. Here’s what project finance is.
Project finance is used to finance a project in a sequential process. Project finance is useful in the case of large projects related to industrial or renewable energy projects. The main feature of project finance is the whole amount is not invested upfront.
Let’s take an example to illustrate how project finance works.
Let’s say, project U needs to get started. To finance the project, the project authority talks to a bank or a financial institution for a 10% upfront amount of the whole project by showing them the projected cash flow of the project. Bank/financial institutions will go through the whole model and would see whether they would like to invest in the project or not (in a nutshell, it’s a complete discretion of the bank/financial institution).
The bank/financial firm talks to a few equity investors who will sponsor the project. These equity investors are called the sponsors of the project. These equity investors offer loans against the project properties. That’s why these loans are called non-recourse loansNon-recourse LoansA non-recourse loan is one in which the borrower must attach some form of collateral security to the loan contract, such as property, equipment, or bank fixed deposits, in order for the loan to be approved. In the event of default, the lender has the right to seize the collateral in order to clear the dues.. The idea is to pay off the loan whenever the project will bring in cash flow. If the project party fails to pay off the loan, the project properties against which the loan is given will be seized.
To execute the whole project properly, a special purpose entitySpecial Purpose EntityA special-purpose entity is created to fulfill particular objectives, including devising measures to appropriate financial and legal risk profiles. It has a predefined purpose and a limited scope in terms of activity and is sometimes used as a short term solution to a current or potential problem. is built to support the entire project. Project finance works in this manner. So, you can understand how important it is to be at the forefront, dealing with banks/financial institutions/equity investors.
Career Paths in Project Finance
If you’re looking to get into project finance, there are two – advisory and lending.
Let’s understand each of them in detail.
#1 – Advisory
- Go back to the previous example we gave. First, the client goes to a bank/financial institution for financial needs at the early stage of the project. As an advisory, you would be working for the bank and would facilitate the client in providing the maximum value.
- You will be negotiating with the clients on debt loads, debt tenors, financial close, and debt pricing.
- A client will always want the bank to offer maximum debt load, maximum debt tenor, swift financial close, and lowest debt pricing.
- As an advisor, you need to be involved in intensive financial modeling, run different scenarios, and develop marketing materials (e.g. information memorandum), etc.
Please see below one of the job openings in Project Finance Advisory. In this case, the primary responsibility includes assisting clients to prepare proposals, book-building, preparation of pricing comments and underwriting applications.
#2 – Lending
- You work as a lender in the second stage of the project. When the deal is structured, the second project financeProject FinanceProject Finance is long-term debt finance offered for large infrastructure projects depending upon their projected cash flows. Moreover, an investor has to form a Special Purpose Vehicle (SPV) to acquire the same. gets started. As a lender, you would be supporting infrastructure investment deals.
- Once you receive an “information pack” from the advisory bank, you would start off with the work. In lending, your bank may dictate the lending process.
- In that case, you need to lead the lending and one can assume that the bank has been financing a major portion of the project. All the leading roles would be like buy-side roles than sell-side investment banking jobs.
Below is one of the job openings in Project Finance Lending. The key responsibilities include origination and execution of leads, risk analysis, and financial structuringFinancial StructuringThe financial structure refers to the sources of capital and the proportion of financing that comes from short term liabilities, short term debt, long term debt, and equity to fund the company's long term and short term working capital requirements., involvement in the credit process, reviewing, monitoring and analysis of performance, etc.
Also, do have a look at Project Finance Jobs
So you get a brief idea about what project finance is all about. Now, let’s talk about educational qualifications.
First, let’s talk about what banks/financial institutions prefer in project finance professionals –
- Who likes to work on deals (especially credit side of deals),
- Who would like to work harder (if needed), &
- Who thinks for a long haul without trying to achieve instant gratification
If you want to plan beforehand (which most people don’t, they realize it later), here is how to get into project finance –
- First, complete your undergraduate degree in finance/accounting. You need to have the basics clear at the first place.
- Second, you can either go for an MBA in Finance (which is always preferred) or you can pursue a master’s degree in finance (M.Com. or related fields).
- Along with that, you can go for CA / CPA certification. Since CA or CPA is not for the faint-hearted, it would be wise to start this certification just after graduation.
- If you’re looking for any additional qualification which will give you an extra edge, you should go for CFA. Again CFA isn’t an easy thing to do. You need to pass three levels and four years of relevant finance experience to be eligible for the certification.
You need to have the following skills to be able to work in the project finance domain –
- Basics of finance: You need to know accounting, financial analysis, reporting, regulations, and taxations at a foundational level. If you don’t know even one of them, you will have a hard time in working things out in project finance. Moreover, if you have these skills, you will be given preference over other candidates.
- You should be aware of project screening and feasibility study to determine the financial feasibility of the projects and its growth opportunities.
- Should know to Prepare Project Finance Model, Monitor and ensure cash flows, fund flows, Profitability Statements, IRRs, NPV, Payback periods, DSCRsDSCRsDebt service coverage (DSCR) is the ratio of net operating income to total debt service that determines whether a company's net income is sufficient to cover its debt obligations. It is used to calculate the loanable amount to a corporation during commercial real estate lending., projected profitability, and other financial parameters/reports to analyze inflow/outflow of funds and profits/surplus.
- Analytical & Quantitative skills: As you need to handle deals after deals and you need to produce reports, you need to possess the analytical and quantitative skills. That doesn’t mean you need to know advanced level maths; but yes, you need to know the basics well so that you can produce/generate reports quickly.
- Effective communication and liaison skills: As mentioned earlier, you need to handle a lot of deals. For that, you need to talk to the project finance teams, convince them about the terms of the debts, and also negotiate with them on the terms that suit both the parties. Without effective communication & liaison skills, you won’t be able to handle these teams and deals.
- Detail-orientation: A single error can create havoc for the deal. So if you want to make your mark in project finance, you really need to be detail-oriented and make sure that everything is accurate on the basis of the talks and approvals.
- Problem-solving skills: As you grow in your career, you need to have the ability to solve the problems when they arise. This isn’t an essential skill in junior roles; but in senior roles, this is mandatory.
Project Finance Process
Before we talk about skills, it’s important for you to know how the project finance works in detail. This process is from the point of view of the advisor role in project finance because it’s quite complex than the lending roles. Let’s have a look at it step by step –
- Step#1: The advisor team would receive an “information pack” from the investment fund. This “information pack” includes the financial model, the information on the market and other details. Then the team would understand the hunger of the credit committee in the progression of the deal. After that the team would look at similar previous deals to compare every detail and then they look at the security structure of the deal and how SPVSPVA Special Purpose Vehicle (SPV) is a separate legal entity created by a company for a single, well-defined, and specific lawful purpose. It also serves as the main parent company's bankruptcy-remote and has its own assets and liabilities. has been used. SPVs reduce risk from the client’s perspective, but according to the team, SPVs only re-allocate the risk to the team.
- Step#2: At the second step, the team builds its own model and start calling project finance teams. This step is necessary because at this stage the team would deal with the project finance team who would want different terms to go ahead in the deal. In this situation, the team shortlist few banks as per the requirements of the clients and move on to the next step.
- Step#3: At this stage, the amount of debt is decided and the terms of the debt are finalized. In most of the deals, the team offers debt in between 2% and 10% interest rates.
- Step#4: Once the debt terms are decided, the team would go on negotiating with the team which is being shortlisted to participate.
- Step#5: Then once the debt terms are finally decided upon after negotiation, the bank/PE firm goes back to the credit committee for approval.
- Step#6: Finally, once the deal is approved, it’s time for the team to go to equity investorsEquity InvestorsAn equity investor is that person or entity who contributes a certain sum to public or private companies for a specific period to obtain financial gains in the form of capital appreciation, dividend payouts, stock value appraisal, etc. and draft loan documents. At this moment, the clients have already agreed to the debt terms and even if there’s a need to change the terms, it’s almost impossible to do the bidding.
So, you can understand that the project finance team always doesn’t come to the advisor/banks. The banks/firms also create a deal and reach out to the project finance teams.
Work-life balance in Project Finance
- Compared to investment banking, you need to work fewer hours. You will be working 60-70 hours per week in most cases. That means you would have a lot of time for family.
- Many people choose project finance for its healthy work-life balance. But many people move on to other domains after a few years of work in the project finance domain.
Professionals who have 2-3 years of experience in corporate finance or handling M&A deals go for project finance profile. As the project finance profile is quite complex, without prior experience, it’s almost impossible to handle the deals and technical meetings.
The compensation is an important issue for every professional.
Let’s look at the payment structure of project finance analyst in the US as per payscale.com –
As you can see that the salary in the US for project finance analyst is more than $60,000 per annum which is quite decent.
Let’s look at the comparison of the salaries of other related jobs as well –
From the above comparison, it’s clear that the compensation structure in the project finance domain is much better than any other stream. Yes, investment banking jobsInvestment Banking JobsThe investment banking job description is a formal narrative that lists out the essential qualification, basic skills and technical skills required in a candidate to fill in the vacant investment banker position. It also explains the roles and responsibilities to be performed in this job position. pay much more but look at the work hours as well.
Finally, let’s look at the gender division and the effect of experience on a salary of project finance analyst in the US –
From the above graph, we can understand that most of the project finance professionals work in the experience bracket of 1 to 4 years. That means after a while most project finance professionals move on to other domains.
How to think on your way to a great project finance career?
Here are a few strategies you should consider –
- Shift your paradigm: Thinking is a skill. But here we’re not talking about thinking as a skill; rather we’re talking about your ability to change your mind. If you’re still thinking “lending” roles have value in project finance, think again. Lending doesn’t yield good returns and you wouldn’t get as much value as you want in lending roles. Try advisory. You will be able to work with great technical teams, learn a great deal about modeling, and also be able to close multiple deals by thinking long term and by working hard.
- Think fund over bank/firm: What’s important in project finance is a fund, not the firm/bank. So instead of thinking that you would join a bank/firm, think that you would join a particular fund; because funds are more dynamic and savvy than a project finance bank.
- Don’t get caught up in the idea of project finance: Project finance is one arm of an entire operation. So, don’t get caught up in the idea of project finance. You can work in export finance, structured leasing and they take the same sort of skill sets to be precise.
- Think long term: If you want to get into project finance, instant gratification shouldn’t be your thing. You need to think for a long haul and forget about yearly bonuses and compensation at the end of the year. Because if you do, you will never be able to stick to project finance for a very long period of time. Think about deals and closing them as early as possible. The money will come as a result.
As a profile project finance is quite good. From payment structure to work-life balance, project finance pays off really well. But instead of choosing “lending” roles, try to go for “advisory” roles for learning and growing in the project finance industry.