As one of many first buyers within the U.S. photo voltaic market, Brad Bauer’s led groups to “boldly go the place nobody has gone earlier than.” In his fifteen years working in renewables, Bauer co-founded one of many business’s first non-public “YieldCos”, raised practically a billion for one among photo voltaic’s brightest burning stars, and began a brand new firm constructed on the teachings discovered from the final one.
On this #Photo voltaic100 interview, Bauer discusses classes discovered from Cypress Creek, the evolving market construction of the photo voltaic business, and the way forward for improvement capital.
Beginning out in renewables
Richard Matsui: You majored in political science and economics, bought your JD, then began your profession at KPMG specializing in M&A. When did you first resolve to work in renewables?
Brad Bauer: I began out working at a regulation agency in Boston then tagged together with my then-girlfriend, now spouse, when she completed faculty and began practising in San Francisco. I wasn’t enamored with practising regulation — it actually wasn’t one thing I wished to do for the remainder of my life. So I joined KPMG, one of many Massive 4 accounting corporations and was admitted to the partnership just a few years later.
KPMG was a extremely unbelievable place, because it gave me the chance to construct a proactive observe centered on rising mission returns and company profitability and afforded me the chance to work with giant firm CFOs and board administrators at a extremely younger age. I noticed what I loved most about my work was the creativity required to advise sponsors and buyers on project-based transactions. I didn’t work on any photo voltaic tasks at KPMG however was concerned in what had been, on the time, some good-sized wind transactions. I left KPMG pondering photo voltaic had most of the attributes that made wind engaging and thought I’d have an opportunity to make use of what I’d discovered and the relationships I’d in-built photo voltaic.
After leaving KPMG I co-founded MP2 Capital, which was one of many first fairness buyers in U.S. photo voltaic property. There I had the chance to companion with Mark Lerdal, an excellent lawyer and govt, to not point out an ideal individual, and Jeffrey Glavan. We weathered the worldwide monetary disaster and developed a superb sized portfolio of working property that we sold-off in a piecemeal style all through 2014 and 2015.
Following that, I took a 12 months off earlier than becoming a member of Cypress Creek Renewables, the place I used to be the Chief Capital Markets Officer and a member of the Board of Administrators. Whereas there we raised $450 million of company debt and one other $300 million of fairness.
I left Cypress final summer season and shaped Lacuna Sustainable Investments with Patrick McConnell and David Riester. We closed our fund in March of this 12 months.
Cypress Creek: The thesis and the whipsaw
RM: I’d love to listen to your expertise of Cypress Creek, beginning with the early days of the startup and its thesis.
BB: What made Cypress distinctive was the recognized alternative to construct photo voltaic at scale, shortly. We bought MP2 Capital as a result of we didn’t see a path to scale with out a substantial amount of third-party capital and ensuing lack of management. Cypress, however, invested in a nascent market that advanced right into a implausible market, and used the ensuing improvement investments as collateral for its preliminary company facility. As the event investments matured, the corporate was capable of borrow more cash, which fueled extra funding. The market, after all, was North Carolina, the place the mix of the general public utility fee’s implementation of PURPA, the North Carolina state tax credit score, the federal tax credit score, and to a extra restricted extent, the state RPS and property tax abatement, created the market. In some ways, North Carolina was the proper alternative: Not solely did you’ve gotten the monetary traits simply talked about however you additionally had loads of cheap land, clear interconnection and entitlement processes and affordable labor prices. The velocity at which tools costs dropped didn’t damage both.
All this allowed Cypress to accumulate, construct, and finance a big quantity quantity of property in a brief time period. It was a uniquely thrilling and but unsustainable alternative, with an unbelievably gifted group of individuals motivated to do nice issues.
RM: As Cypress grew its headcount to 400+ individuals, everybody within the business was speaking about Cypress. Invariably the dialog would contain some model of, “Wow, that’s extremely aggressive progress,” adopted instantly by, “However the crew there may be actually sturdy.” I’m not a mission developer myself so I can’t assess improvement talent, however I do intently observe reputations. Regardless of having such a powerful crew, issues didn’t go to plan. What occurred?
BB: Finally, Cypress growing at scale outdoors of North Carolina, whereas managing the rising price construction, was problematic. And saying Cypress was a pure greenfield developer is a little bit of a misnomer. Whereas there was some early-stage improvement at work, Cypress had entry to capital (company and mission stage) and went out and purchased tasks from native builders at a tempo and quantity tacked to most use of accessible capital. The sheer variety of acquisitions and the ensuing want to maneuver numerous small tasks by way of the system led the corporate to construct a military of individuals centered on all points of design, engineering, building and financing. And for a time it labored, when the market was profitable and situations comparatively static.
Sadly, worth is finally decided on the firm, reasonably than mission stage, and in case your price of manufacturing exceeds the worth of what you’ve gotten produced, effectively, that’s not a superb factor.
The board dynamic was robust because the fairness selected progress over worth creation, the lenders took a laissez faire method primarily based on their underwriting of asset values, and each determined to disregard the truth that the North Carolina market was distinctive and unlikely replicable elsewhere. Because it turned out, the North Carolina market modified for the more serious, new markets didn’t develop, asset valuations had been overly optimistic and the corporate couldn’t sustain with the fixed want for capital. Because of this, the corporate’s lenders turned the fairness and have spent the previous couple years out there searching for solutions.
Cypress’s price construction wasn’t that of a profitable developer. It was structured extra alongside the traces of a producer with disparate teams tasked with transferring numerous small tasks by way of design, engineering, building and financing. Undoubtedly not the kind of lean, value-creation focus one sees in a profitable developer. Whereas we did elevate some most popular fairness late within the life-cycle, for many of its existence the corporate was funded nearly completely with debt, and loads of it. To service the debt, it needed to preserve a continuing velocity and quantity of tasks that will generate a projected worth. Overly optimistic assumptions as to improvement timelines, megawatts or mission values create large issues when you’ve gotten excessive SG&A and quarterly curiosity obligations. If the sale market slows, a market doesn’t materialize or financing assumptions decline, the one method to meet your fastened and variable price calls for is to lift extra capital.
As these items occurred, the corporate wanted extra, and extra, and more cash. However absent earnings or worth creation, this turned an uphill battle. Growth takes time and valuation is dynamic. So in case you’re not capable of construct as many property as you thought as shortly as you thought, they usually don’t have as a lot worth as you thought, it’s a whipsaw. You’re in bother.
Cypress Creek: the teachings discovered
RM: You appear to be declaring two sides of the identical coin — the aggression is what enabled Cypress to have that scale of affect, but it surely additionally created some structural challenges. Whenever you take a step again, what classes do you draw from that? As a result of in the long run it’s not so simple as, “Don’t be aggressive,” proper?
BB: Completely. Lesson primary: Profitability, worth creation, and liquidity are completely crucial for long-term success. In the event you’re not worthwhile or in case you’re not creating worth you aren’t going to have entry to the money you want for very lengthy, And with out it you aren’t going to outlive.
Lesson quantity two: Even an ideal tradition wants a technique. Cypress had an unbelievable group of extraordinary professionals centered on doing nice issues. A very nice tradition.
Lesson three: Simply because somebody is prepared to mortgage you cash doesn’t imply you need to take it.
Lesson 4: Proudly owning property isn’t for everybody. In the event you suppose it’s for you, it’s essential to know what you’re attempting to perform. Why do you need to personal the asset? Are you able to afford to personal the asset? What are you going to do with the asset? Are you the perfect, least expensive, proprietor of the asset? Is possession the best and greatest use of your restricted assets?
Lesson 5: Individuals who don’t put together for a wet day simply haven’t been round photo voltaic lengthy sufficient. This goes to capital construction. Be sure to are capitalized such you can thrive in good occasions and survive the rocky ones. And select the best companions.
Finally, you’ve bought to focus in your backside line; take actions constant along with your short- and long-term targets; make sure that in case you take different individuals’s cash you’ve gotten a superb use for it; and put together for the inevitable cloudy day so you will get to the opposite aspect.
RM: I’m reminded of a earlier #Photo voltaic100 interview with Ed Feo, by which he stated that having a hard and fast annual megawatt goal is a elementary mistake for a improvement enterprise, just because markets change always. How do you concentrate on that?
BB: I agree. It comes right down to capital construction. If you’re capitalized with debt, the die is solid. You want to construct X megawatts at Y margin with the intention to meet SG&A and capital obligations. If the markets change, you might be in bother. In the event you can’t meet your capital obligations, you might be in bother. That’s the problem. Folks love the concept of preserving fairness upside however usually fail to acknowledge the way it impacts threat. It’s laborious to get off the debt treadmill. A capital elevate feels nice, however buyers and lenders anticipate returns of and returns on capital, and in case you are not creating worth in extra of those quantities all you might be doing is being profitable for others.
Evolution of the soalr market’s construction
RM: You’ve written about selecting improvement capital paths, and I assumed this line was rather well put: “Alas, conservatism and prudence will not be the primary two phrases that come to thoughts when one considers builders, so the expansion treadmill is widespread.” I’m intensely serious about theories of how the market construction of our business will evolve, and so I actually loved the Three-part sequence your agency printed on the way forward for improvement capital. Clear pondering is tough to come back by. Are you able to define that thesis?
BB: In a sentence, it’s that your selection of the way you capitalize your organization and property finally dictates the actions it’s essential to take. Builders often take the highway that gives the best potential upside, however don’t take into consideration how capital construction creates threat in attaining that upside. In that paper, we posit that anytime you’re taking anyone else’s cash, you’re giving up one thing. And it’s a must to perceive what it’s that you simply’re giving up and the way that impacts you personally. Which I feel Dave, who wrote the article, does an ideal job of laying out.
Growth is an extremely cash-intensive enterprise, and while you’re brief on money it finally takes away alternatives. So you actually need to be enthusiastic about capitalization always. There isn’t a one proper reply by any stretch of the creativeness, however there are just a few solutions:
Self-financing, if you are able to do that, is totally implausible, however it’s a must to have loads of conviction or it’s essential to have a heck of some huge cash.
For builders attempting to lift money on the company stage, it’s a must to have a heck of a superb thesis and it’s a must to have a market you can “exploit” and never have greater goals of going outdoors that market on the outset.
Promoting to bigger builders could be a nice scenario, although it’s fraught with challenges as a result of everyone is competing for capital. That inevitably creates a mission hierarchy, and capital flows to the best and greatest alternatives. And as soon as your mission is in anyone else’s pool, you’ve misplaced management over it.
Elevating project-level improvement capital is difficult and dear, but it surely does permit for a number of the advantages of each self-financing and corporate-level financing. It permits you to management your individual future to a larger extent.
RM: The article raised an attention-grabbing analogy with tech, actual property, and pharma: in different industries you see the emergence of early stage, true fairness threat capital. Fairness capital is ready to tackle that threat, regardless of the distinctive complexities to every of these asset courses. Why has third-party improvement fairness been so scarce for our business? I perceive why it took some time for tech VC to emerge, however energy plant improvement has existed for a very long time.
BB: I feel it comes right down to the risk-adjusted return potential and the hassle required to supply, diligence and monetize the investments. When you concentrate on an early-stage expertise or biotech funding, there may be usually a longtime marketplace for the funding and a single funding can carry a complete fund. There’s successfully limitless upside to these investments due to the character of what’s being produced.
In distinction, photo voltaic and storage improvement investments are fairly sophisticated and painful to put money into; it’s area of interest work with loads of paperwork and fashions. There’s binary threat. The examine sizes are fairly small. It’s a troublesome house to deploy giant quantities of cash, and there’s a limitation on the upside potential of the investments. Alongside these traces it’s not troublesome to think about house owners and builders seeking to Photo voltaic Income Places as a way of eliminating draw back dangers, which might, in flip, enhance risk-adjusted returns for buyers and reduce capital prices for builders.
Market dynamics additionally change quickly. As off-take contract phrases get shorter and shorter, buyers are who need to deploy cash into the U.S. photo voltaic market are being pressured to take increasingly service provider threat, which can create winners and losers.
RM: I feel the “low-upside, high-downside” commentary may be very astute; I haven’t heard it earlier than. On service provider threat, I’ve been astounded by how shortly fairness went from taking zero service provider threat to accepting the best service provider curve it could actually discover. One must assume the subsequent logical step can be for buyers to simply accept Ventyx at 3x.
Over the previous three years there was a powerful shift towards tie-ups between builders and long-term asset house owners. The asset proprietor’s motivation is evident: entry to deal-flow. However it’s much less clear to me why builders have taken this path. BlackRock with Distributed Photo voltaic Growth; Capital Dynamics with Sol Techniques; Osaka Gasoline with SolAmerica. What modified on the developer’s aspect?
BB: Essentially, it’s a necessity for capital. Growth pipelines are a really thirsty plant: they want loads of money on the outset, and much more money as they mature. Most builders don’t have the money to deal with the magnitude of funding required to help PPA deposits, hedge deposits, and interconnection deposits on a mission or portfolio foundation. Additional, as we’ve mentioned, there are such a lot of variables to juggle whereas growing photo voltaic. Locking in maybe the most important one — purchaser pricing assumptions — even when it’s not the highest of the market, could be very engaging.
Why the photo voltaic sector might stay fragmented
RM: Does photo voltaic improvement change into kind of fragmented over time? What I discover fascinating about your publish is that whereas it’s change into much less fragmented just lately, it will seem that you simply suppose there can be extra.
BB: Giant builders that may create a substantial amount of “product” for long-term buyers are extremely engaging. Nonetheless, improvement is primarily native, and huge nationwide builders are hard-pressed to make that work. We’ve all seen this play out during the last 10 years.
The entrepreneurial nature of builders is that they typically need to be small outlets. Builders need to take as a lot threat as they’ll — ideally with different individuals’s cash — and taking project-level capital creates that chance. Because the tasks transfer towards NTP, the examine sizes change into bigger and bigger, and at that time limit you hope to have the ability to discover the best long-term proprietor, versus having that center step alongside the best way the place it goes from native developer who created the chance, who sells it to the bigger developer who takes their lower, after which it’s finally bought to the best long-term proprietor. If the developer can skip that center step there’s more cash within the deal for them.
RM: In case your thesis is appropriate and third-party improvement capital continues to develop in share, what are the second-order results that you simply anticipate? For instance, do you see extra “Cypress Creeks”, improvement platforms-turned-asset house owners, rising?
BB: A profitable improvement enterprise should be good at managing capital and threat. As firms develop and try to seize increasingly of the worth chain, the required focus is commonly misplaced. So the core query needs to be whether or not vertically built-in builders/IPPs could be as environment friendly and disciplined as crucial to achieve success. Can they decide how greatest to allocate finite assets in a fashion that enables them to be worthwhile and create fairness worth? It’s laborious to think about an instance of a giant developer that has gotten this proper within the photo voltaic house. The pages of photo voltaic magazines are crammed with individuals who had aspirations of greatness however had been unable to make it occur. Power markets within the U.S. are fragmented, ebb and stream with public coverage, and it’s robust for giant organizations to handle this dynamic. In distinction, smaller organizations which are nimble, fast, and have entry to capital are sometimes higher positioned for achievement.
It’s actually potential that insurance policies, economics, or prices will change in a approach which means giant nationwide builders and IPPs could have a bonus, simply as it’s potential that environment friendly organizations will develop out of latest markets. However I feel the previous goes to take a while and the latter appears reasonably unlikely. So my cash’s on the smaller nimble outlets who pursue the best alternatives, decide the best companions and have the capital crucial to show concepts and alternatives into tasks.