Structuring Private Equity Funds For Investment In Renewable Energy .

Presenting a live 90-minute webinar with interactive Q&A Structuring Private Equity Funds for Investment in Renewable Energy Projects: A New Financing Option WEDNESDAY, JUNE 14, 2017 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today’s faculty features: John J. McDonald, Partner, Troutman Sanders, New York Justin Boose, Partner, Troutman Sanders, New York Adam C. Kobos, Partner, Troutman Sanders, Portland & San Francisco The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

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STRUCTURING PRIVATE EQUITY FUNDS FOR INVESTMENT IN RENEWABLE ENERGY PROJECTS: A NEW FINANCING OPTION Strafford National Webinar June 14, 2017 John McDonald Justin Boose Adam Kobos Partner Partner Partner Troutman Sanders LLP Troutman Sanders LLP Troutman Sanders LLP John.McDonald@ TroutmanSanders.com Justin.Boose@ TroutmanSanders.com Adam.Kobos@ TroutmanSanders.com

A NEW AND CREATIVE STRUCTURE The emerging trend of energy private equity (EPE) funds is revolutionizing the renewable energy field, as renewable energy joins leveraged buyouts, venture capital and hedge funds as asset classes that institutional investors and high net worth investors are using to deploy their capital in a diversified manner, with the added “social good” of investing in a sustainable energy future. Sophisticated energy sponsors are increasingly eschewing the traditional project finance structure, in which capital stacks are created for each deal, in favor of a private equity fund structure in which committed capital is deployed by the sponsor in accordance with a specified investment strategy. From the sponsors’ perspective, the goal is the “holy grail” of all private equity sponsors – permanent capital. This trend can be seen as further evidence of renewable energy maturing as an asset class within the larger investment world. Since this trend is so new, the terms of EPE funds vary tremendously. However, some common terms have emerged . 6

COMMITTED CAPITAL Committed Capital EPE funds typically employ a traditional private equity fund structure in which LP investors sign subscription agreements requiring them to make capital contributions in response to capital calls issued by the sponsor to fund investments made by the fund in accordance with the investment strategy. This contrasts with traditional project finance structure in which the sponsor creates a project company for each investment and then sources investors to provide equity capital for that investment (like the “fundless sponsor” LBO model). U.S. renewable energy “tax equity” investments are still predominantly done utilizing the traditional project finance structure, rather than a committed capital structure. 7

INVESTMENT STRATEGY; CARRIED INTEREST Investment Strategy EPE funds are typically focused on investments in a particular sector – renewable energy, waste-to-value, etc. – and consent of a majority-ininterest of the LP investors (or, less frequently, the LPAC) is required for the fund to make deviating investments. Carried Interest & Management Fees Carried interest and management fees in EPE funds vary significantly based upon relative negotiating strength of the parties, which is often a function of the sponsor’s track record and the sophistication of the LP investors. Some EPE funds employ traditional “2&20” private equity fund structure, in which the sponsor receives a 2% management fee on committed capital (stepping down to apply to invested capital once it is deployed), along with a 20% “carried interest” share of the profits on investments made by the fund. 8

DISTRIBUTION STRUCTURE Distribution Structure Waterfall distribution structures vary considerably across EPE funds, but many employ a traditional private equity distribution structure in which the LP investors receive back their invested capital, plus a preferred return on that invested capital, and then the profits are split. Profit are split between the LP investors and the sponsor in accordance with the traditional 80/20 “carried interest” split ratio. This “hard pref” approach, in which the split is only of the excess over the pref, is commonly used in US real estate private equity funds. However, as with US LBO funds, there is sometimes a “disappearing pref” structure in which, once the LP investors receive back their invested capital plus the preferred return, there is a “GP catch up” so that all profits in excess of invested capital are split 80/20 between the LP investors and the sponsor. 9

DISTRIBUTION STRUCTURE (cont.) Distribution Structure (cont.) Sometimes the fund economics are structured to mirror the traditional project finance waterfall structure by providing for the profit split among the sponsor and the LP investors to occur on an investment-by-investment basis. If an investment-by-investment approach is used, there will typically be a “clawback” to the extent that doing so results in the sponsor receiving proceeds in excess of agreed-upon 80/20 profit split as a result of early, very profitable investments followed by losses. Payment of the carry to the sponsor is sometimes deferred or the funds are escrowed. However, sometimes the 80/20 carried interest split of profits occurs on an aggregate basis across all investments made by the fund and the sponsor only receives its portion upon liquidation of the fund’s last investment. The aggregate approach is consistent with that commonly used by European private equity funds. 10

FUNDRAISING PERIOD Fundraising Period EPE funds typically employ the traditional private equity fundraising structure in which an initial closing occurs and subsequent closings in which additional LP investors commit their capital to the fund occur over 6-18 months thereafter. However, for EPE funds making “tax equity” renewable energy investments, it is often not possible, due to tax law limitations relating to pass-through of the tax credits flowing from the underlying investments, to use a fundraising structure in which there are subsequent closings in which new LP investors retroactively participate in investments made with capital provided by initial closing LP investors. As a result, that EPE funds making “tax equity” renewable energy investments typically have one closing, in which all of the LP investors commit to invest their capital. 11

INVESTMENT PERIOD Investment Period In EPE funds that provide capital to construct renewable energy facilities that will, upon completion, be sold to long-term investors, the fund’s investment period often follows the approach customarily used in private equity funds. In those types of funds, there is a stated investment period, in which the fund sponsor identifies investment opportunities, calls capital from LP investors to make the investments, and the capital is used to construct the facility. Upon completion of the facility, cashflow from the facility and sometimes sale proceeds from sale of the facility, are used to repay LP investors. Upon realization of all investments made by the fund, it is liquidated. However, the investment period can vary considerably for EPE funds making other types of renewable energy investments, including those that invest in completed projects. 12

INFORMATION RIGHTS Information Rights EPE fund investors typically receive the following information from the fund sponsor: - Quarterly and annual financial statements, with the annual financial statements often being required to be audited - Form K-1s and other documents necessary for investors to complete their tax filings - Annual reports to investors summarizing the fund’s performance In addition to receiving the documents listed above, EPE fund investors typically have the right to inspect the fund’s books and records and sometimes have the right to meet with the sponsor to discuss fund performance. 13

REGULATORY ASPECTS Regulatory Aspects Like other private equity funds, energy private equity funds are required to comply with federal and state securities laws: - The Securities Act of 1933 - State Blue Sky laws - The Investment Advisors Act of 1940 - The Investment Company Act of 1940 14

CONCLUSION Conclusion In conclusion, there can be no doubt that renewable energy transaction structures are evolving as sponsors move away from the traditional project finance model of constructing a capital stack for each project, which they view as inefficient and wasteful. Instead, sponsors are increasingly moving toward a committed capital structure in which LP investors have a streamlined way to deploy capital across a portfolio of renewable energy assets selected utilizing a specified investment strategy. This trend could help transform the way in which renewable energy projects are financed and lead to further growth in the use of renewable energy. 15

QUESTIONS? John McDonald Justin Boose Adam Kobos Partner Partner Partner Troutman Sanders LLP Troutman Sanders LLP Troutman Sanders LLP (212) 704-6234 (212) 704-6349 (503) 290-2321 John.McDonald@ TroutmanSanders.com Justin.Boose@ TroutmanSanders.com Adam.Kobos@ TroutmanSanders.com 16

finance structure, in which capital stacks are created for each deal, in favor of a private equity fund structure in which committed capital is deployed by the sponsor in accordance with a specified investment strategy. From the sponsors' perspective, the goal is the "holy grail" of all private equity sponsors - permanent capital.