Private Equity Tutorials
- Private Equity Basics
- What is Private Equity?
- Private Equity Analyst
- How to Get Into Private Equity?
- Private Equity Interview Questions
- Post Money Valuation
- What is Growth Capital?
- Term Sheet in Private Equity
- LP vs GP
- General Partner in Private Equity
- Carried Interest in Private Equity
- Clawback in Private Equity
- Preemptive Rights
- Drag-Along Rights
- Types of Alternative Investments
- Private Equity vs Hedge Fund
- Project Finance vs Private Equity
- Private Equity Books
- Venture Capital Books
Project Finance vs Private Equity – Let’s say that you are just starting out in learning finance and you have heard about both of these – Project Finance and Private Equity. You have mixed feeling about these careers. As they are in finance domain, you feel that no matter what, you would love each of these. But is it? We will bust some myths here and show you how you need to approach your career in these two, completely different subjects.
Here’s the flow we will follow – we will first talk about why you should study both of these subjects (both are very vast in scope and opportunities); then we will define both of them; then we will discuss about important concepts in each of these subjects; then we will talk about the compensation, education and work-life balance; and finally we will do a comparative analysis between these two.
Let’s bust the confusion and slake your thirst of knowing these two in little more detail.
#1 – Why study Project Finance or Private Equity?
Project finance is an art of financing the project, often quite large from different sources of funds. So if you know project finance, it would help you to understand how the whole process is being taken care of. Suppose, you join a bank after you study and see that your bank works as a financier for a project management company. You need to know in greater detail that how bank will decide to invest in the project or not to invest. The bank will see the projected cash flow through financial modeling and then if the projected cash flow seems satisfactory, then only will sanction loan. You also need to know about what collateral the project management company will keep as mortgage as they can’t mortgage their own company assets.
In case of private equity, you need to be pretty good with investment analysis. In private equity, you are basically part of a firm where many investors will come together to invest in a worthy business. So you can understand that there are many businesses that need the funding. But a private equity firm will only invest in a business where the ROI is highest. You need to know to do comparative investment analysis so that you can figure out how much opportunity cost you are incurring as a result of deciding to invest in a particular business. Often people confuse between investment banking and private equity; but both are different. In investment banking consultant arrange funds for businesses/clients. Investment banking is a capital raising service. Whereas, private equity firm invests; as a part of the analyst team in private equity firm, your job is not to advise, but to invest.
Studying these two subjects will give you typical concepts and knowledge about these two kinds of sub-domains of finance. And both are very much prevalent in our business world, now-a-days.
#2 – Project Finance vs Private Equity – Meaning
What is Project Finance?
Project finance is useful when firm/s decide to start a large project usually industrial or renewable project. Any project needs funding. At the beginning of the project there are no assets. So how the loan would be arranged? The financiers or the sponsors (often equity investors) decide to see the projected cash flow of the project and then invest on the basis of the projected cash flow. Now, what if the project doesn’t earn that much cash flow as projected. How would they pay the amount invested in the project? To solve this issue, the project assets which are being used in the project are used as collaterals. If by any chance, the project doesn’t earn that much cash flow and thus is not able to pay off; then the project assets are taken over by the financiers or sponsors.
Now, the above is just an overview of project finance. There are many nitty-gritty of this. Many parties and documents are used as a part of the process which you will get to know in later section.
What is Private Equity?
There’s no doubt about it that private equity is completely different than project finance. In case of private equity, there are usually four functions. The first and most important function is fundraising. Normally fundraising is being done by the senior associates. But as juniors also there are ample opportunities to analyze the past performance, past investors and the strategy used in the past. Often, as junior associates, you need to do credit analysis. The second function is screening. In screening, the junior associates take pivot roles. They look for all the opportunities and screen by using financial models (DCF Valuation, Net Present Value method etc.). They see whether investing in these projects would be profitable or not. The third function is managing investments and portfolios. Associates help to turn around operations and also help increase operational efficiency (EBITDA, ROE etc.). Lastly private equity associates also work on their fourth main function and that is to analyze exit strategy that needs in-depth analysis.
Private equity associates need to be thorough with financial models. They also need to have in-depth investment knowledge and be aware of the market changes every now and then. Go for this profession, if you have a knack of analysis and a passion for investment in broader sense.
#3 – Important Concepts
In this section we will learn few concepts in project finance and also get to know about the parties involved and documents required.
- Project development: Project development is one of most important concepts you need to know. As project finance is all about funding in a project in sequential manner. So it’s important to know the stages of project development –
- Pre-bid stage
- Contract negotiation stage
- Money-raising stage
- Parties involved: There are many parties involved in project finance. Let’s look at all these parties in brief –
- Sponsors: People who sponsor the project, often equity investors.
- Lender: Financial institutions which lend money for project.
- Financial advisors: They help the parties to understand how much return on investment they can make. They can be in both sides – lenders or borrowers.
- Technical advisors: Often for effective execution of the project, technical consultants are hired. They act as technical advisors for the project.
- Legal advisors: As the name suggests, they help in legal matters.
- Debt Financier: People who give secured loan for the project on the basis of project assets.
- Equity Investors: People who invest the money in lieu of shares.
- Regulatory agencies: Generally, government authorities who take care of the regulations in regard to the project intricacies.
- Multilateral agencies: The agencies are part of the World Bank group.
- Document required: There are few documents which are of utter importance. Let’s have a look at them –
- Shareholder/sponsor documents
- Finance documents
- Project documents
- Other project documents
- Financial Models: Before investing any investor would like to know how their money would be recouped. Similarly, the sponsors when are requested to invested into a project, they need to know how the project will do. Thus they hire people who can calculate projected cash flow so that they can understand the merit of the project and how much ROI they can expect out of it. And the projected cash flow is calculated through financial modeling. Financial modeling is just a spreadsheet comprises of important calculations.
There are few concepts which will give you a hint of what you can expect under private equity as you learn more about private equity. Let’s have a look –
- Private equity investors: In general, investors who invest in business in lieu of the ownership of those businesses will be called as private equity investors.
- Angel Investors: Investors who invest in start-ups and often very risky business are named as angel investors. Angel Investors often take a major role in the company after they invest.
- Venture Capitalists: Venture capitalists are group of investors who pool their money and invest in private businesses. Do checkout the difference between Private Equity and Venture Capital
#4 – Project Finance vs Private Equity – Compensation
As project finance professionals, your compensation is huge. On an average a project finance professional gets around US $100,468 per annum. But you need to arrange everything from top to bottom. You will be having very less options to delegate the tasks as if there’s even a little discrepancy; then you would be answerable to your seniors. To be project finance professional, you need to have few years of experience before you can take charge.
In case of private equity firms, if you work as an associate, you get paid well. And it is as lucrative as investment banking professionals. Depending on how much value you bring to the market place, your compensation ranges from US $100K – $220K per annum. There is no wonder why a ton of finance professionals are aiming to be hired by private equity firms.
#5 – Project Finance vs Private Equity- Education
The pre-requisite to be project finance professional is to have a knack for analysis and solving problems which may arise out of no-where. Along with that you need to do your MBA in Finance from a reputed institute. After going through the top 25 project finance profiles in India, we have come to the conclusion that MBA is a must to reach higher in organization that helps build projects. Other than that, if you have any background in Chartered Accountancy, Cost Accountancy or have a degree in Law along with having an MBA from a sought after B-School, you will create magic in the world of project finance.
Private equity professionals need to have more knowledge in investment. Thus, if they do an MBA in Finance, that’s good. But they need some value addition as well. The best course to pursue, if they want to be the top most professionals in private equity would be CFA. This course is so well designed that it is regarded as the best course for anyone who wants to thrive in investing profession. CFA is not an easy exam to pass. But if you are committed to make your mark as a private equity professional, you will clear it in due time. Remember, commitment is the key.
#6 – Project Finance vs Private Equity- Work-life balance
In case of project finance professional, the work pressure is much more than a normal 9 to 5 professional. As project finance professionals need to handle multiple things at a same time, they need to invest minimum 12 hours a day or even more. Normally, rarely do they work in weekends, but they may need to work if any crisis arises and they need to solve the issue immediately. Thus, project finance professionals maintain a good work-life balance.
Private equity associates also invest 12 hours a day working. Usually, they don’t work in the weekend and very rarely do they need to be present all night for the analyses. So their work-life balance is also taken care of. They get enough time to mingle with their families and practice a hobby or two.
Comparative Analysis – Project Finance vs Private Equity
Let’s look at some of the differences between project finance and private equity –
- The main difference between private equity and project finance is a matter of context. Project finance helps projects thrive; whereas private equity helps businesses (usually the best, not always) reach to the top.
- A project is often financed by private equity investors. So there is a direct link between project finance and private equity where both serve the same purpose.
- Private equity is not limited to only project finance. The investors also invest in thriving or start-up business depending on the marketability of the idea and the value the businesses are bringing on the table.
- Culture in Private Equity in Germany
- Private Equity Culture in France
- Private Equity Requirement in Russia
- Private Equity in India
- Corporate Finance vs Project Finance
- Equity Research vs Private Equity
In the final analysis
Both of these subjects are vast and they have ample career opportunities. Ask yourself – “What’s most interesting to me?” and “Why?” If you’re able to answer these two questions clearly, you will be able to choose a career you would be proud of in near future.