Deal-Makers’ Secret Weapon: The Transformative Role of Project Finance Support in Investment Banking

Government and corporate organisations often undertake large-scale projects involving large amounts of capital. The concerned organisation might not have a lumpsum amount to start a capital-intensive project. It does not mean the project should be in standby mode until the funds are accumulated. Loan and funding options are available for organisations to complete capital-intensive projects. Project finance is a mix of loans and funding for organisations looking to initiate large-scale initiatives. With project finance support for IB (Investment Banking), profitable deals for large-scale initiatives occur. Read on to understand the role of project finance support in investment banking.

Do you understand the concept of project finance?

Before discussing the role of investment banks, it is essential to understand the concept of project finance. Project finance is a funding technique used for large-scale or capital-intensive projects. Infrastructural, energy, and expansion projects are a few ones requiring large amounts of capital. Traditional bank loans or funding sources might not provide organisations with large amounts of capital.

You might be thinking about how project finance is different from other financing sources. With project finance, investors sanction loans for organisations to complete the underlying project. The cash flows generated by the project in the future will be the collateral for the loan.

In some cases, the entire project can act as collateral for the loan. For example, a government entity might collect funds via project financing to construct a bridge. When the government entity fails to repay the investors, they might take control of the revenue generated by the bridge. Before offering funds, investors check for the revenue-generating powers of the particular project.

It is because the revenue generated by the project after completion will be used to repay the investors. The focus is on the predicted cash flows for project financing. Also, there is no compulsion that only government entities can seek project finance support. Private organisations also collect funds via project financing for numerous reasons.

Project finance usually has long repayment tenures. At the same time, the investment horizons will also increase, and investors will receive long-term profits. Project finance also provides sponsors with the non-recourse loan option. With a non-recourse loan, investors will only have control over the collateral. They cannot sell the personal assets of sponsors to cover the costs when a project fails.

Some investors might go for the recourse option, where they have control over the personal assets of sponsors to cover costs. Usually, investors tend to put their faith in the revenue-generating powers of the project. Even though there are a few risks, project finance has several opportunities for all the involved parties.

Understanding the role of project finance support in IB

Investment banks are supposed to provide project finance support to the concerned parties. They help organisations to predict the revenue-generating capabilities of a large-scale project. Investment banks also help organisations meet the right investors to fund capital-intensive projects. Project finance support for IB is also available from reputed third parties. These third parties help investment banks meet the project finance needs of clients. Here’s how project finance support plays a role in investment banking:

Improved risk management

Before searching for funding sources, investment banks have to analyse the risks associated with a large-scale project. Investment banks might not help organisations with projects full of risks. With project finance support for IB, the risks associated with a large-scale project are understood. For example, the organisation might not have the necessary permissions to complete the project in an area. In such a case, there are legal risks associated with the project.

Improved deal structuring

With the help of project finance support, investment banks can help their clients choose the right capital structure. Organisations can divide the funding into debt and equity to suit the demands of the sponsors. Also, the funding type (recourse or non-recourse) can be chosen without any hassles. With additional support, investment banks can understand the best capital structure for a large-scale project.

Risk sharing

With the help of third-party support, investment banks can find multiple investors for project financing. With multiple investors, the risk is equally shared. Investors tend to offer funds when they share risks and not invest alone in a large-scale project.

Access to different markets

Project finance support for IB can help tap new capital markets. Investment banks can help clients draw funding from global markets and connect with new investors. Government entities can also draw funds from investors around the world and complete large-scale infrastructural and energy projects.

In a nutshell

Investment banks help their clients secure funds for capital-intensive projects. The project financing landscape has improved with the help of third-party support. Research firms have helped investment banks tap new markets for project financing. Also, the risks associated with a large-scale project are eradicated with the help of third-party support. Learn more about the role of project finance support for investment banks!

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