Working out the potential financial return of the investment offering to the group requires careful analysis of the investment memorandum. An investment memorandum is a document that a developer presents to potential investors. It presents the investment case in the context of a detailed view of the Project Vehicle, its management team and how the project will be managed.
This will include the size of the equity investment, how long the equity invested will be held for and estimated financial returns. Professional advice from an independent financial advisor should be sought to review this and understand the level of risk involved.
The investment memorandum may give an indication of the project costs including operational costs, maintenance, insurance, and administration in addition to the finance costs. The project income will vary from year to year depending on the resource available (ie the amount of wind that blows or water than flows) and the price of electricity. Careful attention should be paid to administration costs included and different investors may be offered a different share of the profits.
There are a many different variations of the offer being made to a community. These include:
- investment in the full development and construction phases of the project
- investment solely in the construction phase
- investment in the project after construction.
If a group is being offered a 10% investment stake in the project, they can expect to see a maximum 10% of the dividends. However, this is expected to cover debt repayments, etc. The Investment Memorandum will indicate the potential return that might be expected. This size of the return on the investment can be expressed in a number of different ways.
Annual return
The investment return is normally expressed as a % of the amount invested provided over a period of time. An annual return would indicate an anticipated return each year from the start of operations. It is unusual for renewable energy projects to be able to provide a fixed return each year as they have a large capital cost which needs to be paid off before any investors can expect a return.
Lifetime return
A wind project can have a lifetime of over 25 years and a hydro plant might operate for up to 40 years and over. This should be included in the investment memorandum. It is more realistic to consider the investment return over the lifetime of the project, with lower returns likely at the beginning of the project and higher returns later on in the project as evidenced in the case studies.
Percentage of profits
After all income and costs have been considered, the remaining profits (or dividends) will be distributed to investors. The community investor might be offered a percentage of these profits related to the size of investment made.