Anyone who's ever been involved in securing equity investment, project finance debt, offtakers or finding buyers for their assets knows it's a long and arduous process. These transactions typically drag on for 6 to 12 months, leaving all parties exposed to the unpredictable whims of market volatility.
The Volatility Vortex
Market assumptions, rate assumptions, political risk, legislative changes, commodity risk — these are just a few of the factors that can change dramatically during a lengthy transaction.
Over the past year alone, the US 10-year yield, an often used benchmark for the risk-free rate of return, has seen yield high points that were ~30% greater than its yield low points.
There are plenty of very common areas that demonstrate why this market exposure is a big issue for real asset projects. For example, consider the timing mismatch and potential implications of volatility of the following:
- Locking in a PPA price before securing your financing costs (the single largest expense for a renewable energy project)
- Gaining investment committee support assuming a cost of capital based on 10-year treasuries plus a spread
- Launching a sale process in a favorable market tone and taking 6+ months to reach its conclusion
Transaction Implications
This volatility can result in deals falling apart or stalling indefinitely. It also frequently leads to a significant gap between what sellers are asking for and what buyers are willing to offer. The result? Either a stalemate or a negotiation with a counterparty who may no longer be the most attractive option but is the most advanced on due diligence.
Why So Slow?
So, what's the cause of these drawn-out process timelines? The answer lies in a half-dozen key areas:
- The sheer volume of data room documents to be reviewed
- The significant and manual Q&A back-and-forth between parties
- The need to constantly adjust proposals based on due diligence findings and shifting assumptions
- The lengthy transaction documents to be negotiated
- The comprehensive internal reviews and approvals
- Drawn out post-announcement approval timeframes
AI: The Transaction Timeline Terminator
But there's hope with purpose-built artificial intelligence solutions. As AI gets more broadly adopted in processes, it has the potential to cut transaction timelines in half.
The result of AI-supported transactions:
- Smaller volatility window
- Fewer stalled deals
- More value-creating transactions completed