Updated July 13, 2023
How to Get Into Project Finance?
Project finance is a challenging and, at the same time, very exciting and lucrative career path for an aspiring finance professional. Thus, getting into a project finance role is not easy; one must possess commendable analytical acumen and quantitative skills besides a profound understanding of investment banking. However, if you are one of those who intend to pursue a career in the field of project finance, then you are at the right place, as this article will discuss in detail. In short, this article will make your dream come true.
Example of Project Finance
It refers to the funding of any long-term industrial projects or infrastructure with the help of a non-recourse financial structure. In this type of arrangement, the entire funding (mix of debt and equity) is not done at the start of the project but rather sequentially as the project progresses. The repayment obligations are met using the cash flow generated by the project itself.
Let us take the help of a simple example to explain the working of project finance. Assuming the commencement of a toll gate project in 2021, the project will complete within five years, by the end of 2025. to simplify matters, the project will entirely fund through debt, with 20% of the funds allocated annually, starting in 2021, to ensure the project’s completion within the five-year timeframe. The entire funding will utilize by the end of the five years. Following the project’s completion, debt repayment will commence in 2026 and continue over the subsequent ten years, concluding by the end of 2035. The repayment will be made using the revenue from the collected toll tax. Now, the role of the project finance team is to build a robust financial model to study the viability of the future cash flow of the project and, depending on that, decide the capital structure and the source of funding arranged at the same time. A special purpose vehicle (SPV) is created to execute the entire project properly.
In this field, there are two major career paths.
- In this profile, you will be working for a bank or financial institution where you will be involved in the first leg of project finance.
- You need to negotiate the debt amount, tenor, pricing, and financial close with the prospective client.
- You must make advisory proposals, prepare extensive marketing materials, respond to client inquiries, etc.
- In this role, you will be in the second stage of the project finance process, right after the advisory stage.
- After receiving the information pack from the advisory team, you need to build a comprehensive financial with multiple scenarios that help analyze cash flow risk.
- You must conduct due diligence, determine the risk factors and mitigation measures, assess collateral requirements, etc.
Sources depend on the structure of the project and its associated risks. Let us look at some of the most common sources of project finance.
1. Private Debt
The investment banks raise these types of debt, which are available at a lower cost of capital than equity funding owing to relatively lower risk. Some examples of private debt include bank debt, taxable bonds, private placement, etc.
2. Public Debt
Governments usually raise these types of debt under the advice of advisors. These are also relatively cheaper forms of funding as they are government-sponsored programs. Some examples of public debt include TIFIA loans, private activity bonds, etc.
3. Equity Financing
Developers or private equity (PE) funds raise these types of funding. These attract the highest cost of capital as equity funding is the riskiest form of investment. Some examples of equity loans include shareholder loans, bridge loans, strategic & passive equity, etc.
Qualifications of Project Finance
Since project finance roles require strong quantitative skills and analytical ability, they must have an undergraduate degree in business, engineering, economics, etc. In addition, an undergraduate degree can help you join at the analyst level. In contrast, an MBA degree can further push you up the corporate ladder to join at the associate level. Although additional qualifications like CA, CPA, or CFA are not necessary, these can help you beat the competition to get into project finance roles.
Project Finance Salary
Entry-level professionals joining project finance roles can expect to earn $60,000 to $90,000 based on the financial institution they work in, the size of deals they handle, their location, etc. Additionally, there will be a bonus component, which will be another 30% to 50%. Typically, larger multinational banks pay higher salaries than their smaller counterparts. The compensation can go up from $80,000 to $140,000 at the associate level, with an additional 30% to 70% of the bonus component.
- It refers to the process of funding long-term infrastructure or capital-intensive projects.
- Some of the most sources of project finance include private debt, public debt, and equity financing.
- There are two career paths in project finance – advisory and lending.
- To get into project finance roles, having an undergraduate degree in business, engineering, economics, etc, is a must.
So, it is clear why project finance is considered such an exciting and lucrative career path by so many aspiring finance professionals worldwide. But to get into this profile, one must possess the correct educational qualification and the required skills.
This is a guide to how to get into Project Finance. We also discuss the definition, including career path, sources, qualifications, and salary. You may also have a look at the following articles to learn more –