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, it is not an easy task to get into a project finance role, and 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

Project finance 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 in a sequential manner 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. Let us assume that a toll gate would be started in 2021, and it would take five years to complete, i.e., by the end of 2025. For simplicity, let us assume that the project would be 100% debt-funded, and every year (starting 2021), only 20% of the fund would be provided towards the project completion so that by the end of five years, the entire funding would be exhausted. After completion of the project, the repayment of the debt would start in 2026, and it would be repaid over the next 10 years, i.e., by the end of 2035. The repayment would be done using the revenue earned 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, based on that, decide the capital structure while the source of funding is arranged at the same time. A special purpose vehicle (SPV) is created for executing the entire project properly.

Career Paths

In this field, there are two major career paths.

1. Advisory

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 amount, tenor, pricing, and financial close of the debt with the prospective client.
You need to make advisory proposals, prepare extensive marketing materials, respond to client inquiries, etc.

2. Lending

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 in analyzing cash flow risk.
You need to carry out due diligence, determine the risk factors, and mitigation measures, assess collateral requirements, etc.

Sources

Sources are depended 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.

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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

These types of funding are raised by developers or private equity (PE) funds. 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, while 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 a must, these can certainly 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 something in the range of $60,000 to $90,000 based on the financial institution for which they work, the size of deals that they handle, 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. At the associate level, the compensation can go up to the range of $80,000 to $140,000 with an additional 30% to 70% of the bonus component.

Key Takeaways

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, it is a must to have an undergraduate degree in business, engineering, economics, etc.

Conclusion

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 needs to possess the correct educational qualification along with the required skills.

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