Now – what have you learned?
We’ve been in business for a year this summer, and sometimes it feels like, “Wow time flies.” and sometimes it feels like, “Wow how in the world has it only been one year!” We’ve learned so much in our first year, and we’ve changed in incredible ways.
For one thing, we’ve doubled in size. We have twice the direct employees we had a year ago, and we’ve picked up some new skillsets along with our new employees. When we started Saber Equity, we thought a lot about the value we bring to new investments. We’re very technically based. We have project management and process technology expertise that is usually much needed in the early stages of project development. So we developed a checklist of the basics that were needed for a good project investment, and focused on the value we’d specifically bring to that investment. That checklist included the basics like good partners, solid financial model, feed and offtake agreements, capital cost estimate, demonstrated technology and a site selection with a permitting plan.
This checklist still holds, but we’ve greatly expanded it and we’re viewing it with a much more critical eye these days. A project must make it through successful FID to get the funding to construct and operate. Understanding the components of a successful FID, and the players, is paramount. Debt and Equity financing typically want different criteria for their investments, and it’s very important to understand those requirements upfront, and be developing the relationships and knowledge base from the very early stages. Developing a project completely, and then selling to equity providers, hasn’t proven to work very well in our experience. Equity providers will need deep understanding of the project to speed up the diligence process. And with supply chain uncertainty, speed is king. So we’re developing our own relationships with large equity providers, and intend to focus on the partnership aspects of all deals. More transparency, and earlier, can mean a faster path to FID.
For example, we’ve learned that just because there is an off-take agreement in place, doesn’t mean it checks the box. We need a deep understanding of the market, and the future of that market. We need to understand whether the agreement is linked to merchant or fixed pricing, how is it calculated, and is it linked to feed cost at all. Is it an offtaker that will actually use the product and has a reputable name, or is it a marketer? The tenure of the agreement is often critically important to debt and equity providers, and should be reflected in the financial model. Some equity providers want to float with a rising market, but with that higher risk should come higher reward. Some equity providers are looking for more certainty, and will want to understand whether it’s a tolling agreement, a hedge, or has a ceiling and floor to protect their investment. All in all, we’ve learned that we need to dive into the feed and offtake agreements with the same vigor that we dive into the technology behind the investment. How the project ultimately makes its money is key to the success of the project.
The offtake agreement is just one example of how we’ve expanded our knowledge of project finance and investing, and the work we’re doing to protect the investments going forward. I could write similar novels on what we’ve learned about market knowledge and research, banking issues, financing components, insurance products, and impacts to S&B for our investment and project development. But we’ll save some of that for future blogs!
We now have a tiered checklist to grade a new investment with 3 tiers, 10 categories, and 33 specific items. That’s a far cry from the original 6 basic items. We’re very proud of the long way we’ve come in our first year, and we look forward to continuing the journey to develop good projects with and for S&B!