Q&A With Michael Allison, Macquarie Capital - Part I
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Q&A With Michael Allison, Macquarie Capital - Part I

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Macquarie Capital has been an active M&A and capital markets player in the renewables space. The Sydney-based investment banking group whose clientele have included SunEdison’s yield company TerraForm Power, Freeport LNG and Apex Clean Energy, is among a consortium that is leading Lightbeam Electric Co.’s initial public offering. Macquarie aims to bolster its merchant banking capabilities, solidify its focus on contracted assets, and strengthen its relationships with middle market clients under the direction of Michael Allison, senior managing director of the bank’s renewables group. Allison sat down with Managing Editor Nischinta Amarnath to discuss Macquarie’s approach to clients, M&A transactions and capital markets activities. In the first instalment of this exclusive, Allison also offers insights into the bank’s measures to minimize the risks involved in providing development capital for renewable projects.


PFR: Tell me about the renewables group at Macquarie Capital and your role there.

Allison: The renewables team sits inside the broader infrastructure group within Macquarie Capital. We have about half of our infrastructure professionals focused on the energy infrastructure sector, and the other half focused on the area of public private partnerships. I head the renewables group. Our renewables business has a full-service investment banking focus, but our differentiating factor is the ability to put our own capital to work alongside our clients’, which is typical of a merchant banking model. Over the last couple of years we have identified a niche of opportunities where we can provide development capital to our clients, allowing them to get a project through to the finish line – generally the point where a project can start construction. When clients come to us, our role is not only to help them solve their capital needs, but also to package up their project ultimately to sell the asset to a long-term owner.

PFR: You’ve been at Macquarie since 1999. How would you say your role in the company and your strategy has changed over the years?

Allison: I joined Macquarie from Bankers Trust in 1999. I moved to Macquarie Capital, the principal investing, advisory and capital markets division in 2007, having initially sat in our trading business called Commodities and Financial Markets. Soon after joining Macquarie Capital, many financial institutions faced a challenging environment during the financial crisis and we really didn’t have a tremendous amount of capital to put to work. Back in those days, we were more singularly focused on advising our in-house infrastructure funds on M&A. Over time, we have successfully grown our third-party client business and our principal investing business and merchant banking capabilities.

PFR: It appears that Macquarie has increasingly been participating in M&A deals. What are the driving forces behind the company’s approach to clients, transactions and deals in the renewables space?

Allison: We have been very active in renewables but also in the power and midstream sectors. For example, we are the financial advisor to Freeport LNG on various capital raisings. In the renewables space, one of our big client relationships is SunEdison and TerraForm. We completed about 13 deals with them from within our group in the last year. Combining all of our activity in the capital markets, as well as the sale of our two development capital projects late last year, you can see we have been very active.

In terms of our approach to clients, our goal is to establish and maintain deep relationships, and become more than just a fee-based M&A advisor, actually partnering with them on transactions. With our merchant banking focus, we seek to understand the needs of our clients, and provide them with the necessary advice or capital as well as assist with their liquidity needs by helping them sell their projects. Some of the boutique investment banks in the market tend to focus on smaller roles and some of the bigger financial institutions may focus only on larger deals; our focus is on repetitive client interaction in the middle market. We tend to dig in deeper at the asset level, so that we can have a holistic understanding of the transactions our clients are pursuing.

PFR: What kinds of projects has Macquarie been looking to acquire at the moment and what qualities are you looking for in those assets?

Allison: Firstly, the sort of projects that we look to partner on are ones where we can provide capital that solves a problem for our clients. Generally speaking, we also want to see a very strong development partner. The quality of the management team is really important because the development process can be unpredictable and we need to know our partner will work with us to fix any issues that may surface. We look for strong development teams that have the ability to get the project to the finish line, but they have a significant capital need that they don’t have the ability to fund on their own. Finally, when assessing opportunities for providing development capital we like to avoid risks that are binary in nature. Therefore we tend to look at projects where we have enough time to remedy problems when they arise, such as resubmitting permits, fixing interconnection applications, dealing with title issues, or a host of other problems. If things take a wrong turn, we want to ensure that we have the leeway to think through the issues and solve the problem in a strategic manner. We have our own in-house development team based in Austin, Texas that evaluates the critical aspects of the project to make sure that there’s nothing binary in the risk we are taking on. Those are three important factors we look for in our transactions.

PFR: Could you elaborate on the binary risks you are talking about and how these risks have been addressed to date in the context of earlier transactions?

Allison: As you know, the production tax credit and the investment tax credit are set to expire at the end of 2016. As an example, we try to avoid investing in deals where the expected commercial operations date of the facility is very close to the expiration date of the PTC or ITC. If something were to slip in the development timeline, the goal is to still be able to build the project and qualify for the PTC or ITC without having to bet on an extension. We typically don’t like to participate in deals where a delay in a project’s permit, for instance, could risk losing a PPA or the ITC or PTC. While we remain opportunistic and look at lots of deals, we have historically passed on projects where we were not comfortable with the binary-style risks, despite having had a strong development team.

PFR: What are the key aspects of a merchant project that would interest you?

Allison: We have looked at a number of merchant wind deals but are yet to invest our own development capital into one. The clients we service in the infrastructure investing sector are mostly looking at projects that have long-term offtake contracts. So, this has been our focus.

PFR: What is Macquarie’s appetite for project finance deals? What criteria are you looking for in those transactions?

Allison: Historically speaking, we have not provided project finance debt or tax equity. In our view, it’s not really a critical part of our business in the renewables space. In an efficient market, the buyers of projects and the developers understand who can provide finance and they can reach them directly. I don’t think that’s an area where we can provide a very big value add although we do provide that service in other areas of Macquarie Capital - like the Freeport LNG transaction I mentioned earlier. In that deal, we raised capital for the project and our ability to structure a complex debt package was extremely valuable. In renewables, our value add is providing development capital to our clients – an example being the capital we invested with Apex Clean Energy for the Balko wind project in Oklahoma. We gave Apex the capital they needed and they continued to work on the development. When the development was ultimately finished, we ran a sell-side process for them and then we worked with the buyers to help raise a significant amount of tax equity needed to fund the project. Our model is not built around being a typical project finance lender as our cost of capital would not work in that setting, we tend to leave that to the other project financed focused banks. As of today, we have not participated in any tax equity deals either although it’s something we may look at going forward.

PFR: What types of trends are you seeing in transactions for renewables today?

Allison: There is a growing desire for infrastructure funds, direct pension investors, and yieldcos to buy renewable assets. They’re seen as very low operating risk and high margin businesses. These types of projects have largely been successful apart from a few forecasting errors back in the early 2000s. There were some issues back then, but 10 years since, the projects have performed pretty well. Market participants have generally made strong returns. Overall, we are seeing rising demand for good, well-structured projects.

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