How To Get Into Project Finance Career Skills Salary

How to Get Into Project Finance?

If you have decided to build a career in project finance, you are at the right place. This article will discuss how you can get into project finance in detail. Unfortunately, project finance shifted the paradigm due to global financial crises, and the liquidity has been drastically reduced. But there is hope. And you can still build a career of your liking. And reading this article would help.

Without much ado, let us get into the meat of the article.

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Key Takeaways

To get into project finance, one must be aware of accounts and finance (CPA or MBA in finance) and possess experience in infrastructure projects with determining and making cost models, including comparing costs and revenue.One can determine project growth concerning growth with all the generating finance knowledge from banks and the best application approaches.The two career paths in project finance include advisory and lending.Shifting the paradigm, thinking about funds over banks/firms, not getting caught up in project finance concepts, and thinking long-term are a few strategies to get into a project finance career.

What is Project Finance?

You may have heard about the term “project finance” in business articles or newspapers but may not have known its meaning. Here is what project finance is.

Project finance is used to finance a project in a sequential process. Project finance is useful in the case of large projects related to industrial or renewable energy projects. The main feature of project finance is the whole amount is not invested upfront.

Let us take an example to illustrate how project finance works.

Let us say project U needs to get started. For financing the project, the project authority talks to a bank or a financial institution for a 10% upfront amount of the project by showing them the projected cash flow. After that, bank/financial institutions will go through the whole model and see whether they would like to invest in the project or not (in a nutshell, it is a complete discretion of the bank/financial institution).

The bank/financial firm talks to some equity investors who sponsor the project. These equity investors offer loans against the project properties. That is why these loans are called non-recourse loansNon-recourse LoansA non-recourse loan is one in which the borrower must attach some form of collateral security to the loan contract, such as property, equipment, or bank fixed deposits, in order for the loan to be approved. In the event of default, the lender has the right to seize the collateral in order to clear the dues.read more. The idea is to repay the loan whenever the project brings in cash flow. If the project party fails to pay off the loan, they will seize the project properties against which the loan is given.

For executing the whole project properly, a special purpose entitySpecial Purpose EntityA special-purpose entity is created to fulfill particular objectives, including devising measures to appropriate financial and legal risk profiles. It has a predefined purpose and a limited scope in terms of activity and is sometimes used as a short term solution to a current or potential problem.read more is built to support the entire project. Project finance works in this manner. So, you can understand how important it is to be at the forefront of dealing with banks, /financial institutions, /equity investors.

Career Paths in Project Finance

If you want to get into project finance, there are two – advisory and lending.

Let us understand each in detail.

#1 – Advisory

Go back to the previous example we gave. First, the client goes to a bank/financial institution for financial needs at the early stage of the project. Then, as an advisory, you would be working for the bank and facilitating the client in providing the maximum value.You will be negotiating with the clients on debt loads, debt tenors, financial close, and debt pricing.Clients always want the bank to offer maximum debt load, maximum debt tenor, swift financial close, and lowest debt pricing.As an advisor, you must be involved in intensive financial modeling, run different scenarios, develop marketing materials (e.g., information memorandum), etc.

Please see below one of the job openings in Project Finance Advisory. In this case, the primary responsibility includes assisting clients in preparing proposals, book-building, pricing comments, and underwriting applications.

#2 – Lending

You work as a lender in the second stage of the project. When the deal is structured, the second project financeProject FinanceProject Finance is long-term debt finance offered for large infrastructure projects depending upon their projected cash flows. Moreover, an investor has to form a Special Purpose Vehicle (SPV) to acquire the same. read more gets started. As a lender, you would be supporting infrastructure investment deals.Once you receive an “information pack” from the advisory bank, you start with the work. For example, in lending, your bank may dictate the lending process.In that case, you need to lead the lending, assuming that the bank has been financing a major portion of the project. So the leading roles would be like buy-side rather than sell-side investment banking jobs.

Below is one of the job openings in Project Finance Lending. The key responsibilities include origination and execution of leads, risk analysis, financial structuringFinancial StructuringThe financial structure refers to the sources of capital and the proportion of financing that comes from short term liabilities, short term debt, long term debt, and equity to fund the company’s long term and short term working capital requirements.read more, involvement in the credit process, reviewing, monitoring, analyzing performance, etc.

Also, do have a look at Project Finance JobsProject Finance JobsProject finance jobs are those involved in the long-term control and management of infrastructure and industrial projects from a financial standpoint, which includes making financial investment decisions. Directors, managers, and analysts are the various job roles in project finance.read more

Educational Qualifications

So, you get a brief idea of what project finance is all about. Now, let us talk about educational qualifications.

First, let us talk about what banks/financial institutions prefer in project finance professionals: –

Who likes to work on deals (especially the credit side)Who would like to work harder (if needed)Who thinks for the long haul without trying to achieve instant gratification.

If you want to plan (which most people do not, they realize it later), here is how to get into project finance: –

First, complete your undergraduate degree in finance/accounting. It would help if you had the basics clear in the first place.
Second, you can opt for an MBA in finance (always preferred) or pursue a master’s degree in finance (M.Com. or related fields).
Along with that, you can go for CA / CPA certification. However, since CA or CPA is not for the faint-hearted, starting this certification after graduation would be wise.
If you are looking for any additional qualification which will give you an extra edge, you should go for CFA. But, again, CFA is not an easy thing to do. You must pass three levels and four years of relevant finance experience to qualify for the certification.

Required Skills

You need to have the following skills to be able to work in the project finance domain: –

Basics of finance: You need to know to account, financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company’s financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company’s results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more, reporting, regulations, and taxations at a foundational level. If you do not know even one of them, you will have difficulty working things out in project finance. Moreover, if you have these skills, you will be given preference over other candidates.You should be aware of project screening and feasibility studies Feasibility StudyA feasibility study is a study conducted by a company that wants to add one product line to its business with the goal of understanding whether the product should be added or not by analyzing various scenarios such as revenue, cost, competition, and so on.read more to determine the projects’ financial feasibility and growth opportunities.Should know to Prepare Project Finance Model, Monitor and ensure cash flows, fund flows, Profitability Statements, IRRs, NPV, Payback periods, DSCRs DSCRsDebt service coverage (DSCR) is the ratio of net operating income to total debt service that determines whether a company’s net income is sufficient to cover its debt obligations. It is used to calculate the loanable amount to a corporation during commercial real estate lending.read more, projected profitability, and other financial parameters/reports to analyze inflow/outflow of funds and profits/surplus.Analytical & Quantitative skills: As you need to handle deals after deals and produce reports, you must possess analytical and quantitative skills. That does not mean you need to know advanced level Maths, but you need to know the basics to produce/generate reports quickly.Effective communication and liaison skills: As mentioned earlier, you need to handle a lot of deals. For that, you need to talk to the project finance teams, convince them about the terms of the debts, and negotiate with them on the conditions that suit both parties. Without effective communication and liaison skills, you would not handle these teams and deals.Detail-orientation: A single error can create havoc for the deal. So, if you want to make your mark in project finance, you need to be detail-oriented and ensure that everything is accurate based on the talks and approvals.Problem-solving skills: As you grow in your career, you need to have the ability to solve problems when they arise. It is not an essential skill in junior roles, but in senior positions, this is mandatory.

Project Finance Process

Before we talk about skills, you need to know how project finance works in detail. This process is from the advisor role in project finance because it is more complex than lending. Let us have a look at it step by step: –

Step#1: The advisor team would receive an “information pack” from the investment fund. This “information pack” includes the financial model, the information on the market, and other details. Then the team would understand the credit committee’s hunger for the deal’s progression. After that, the team would look at similar previous agreements to compare every detail and then at the deal’s security structure and how SPV SPVA Special Purpose Vehicle (SPV) is a separate legal entity created by a company for a single, well-defined, and specific lawful purpose. It also serves as the main parent company’s bankruptcy-remote and has its own assets and liabilities.read more has been used. SPVs reduce risk from the client’s perspective, but SPVs only re-allocate the risk to the team according to the team.Step#2: The second step builds its model and starts calling project finance teams. This step is necessary because the team would deal with the project finance team, who would want different terms to go ahead in the deal. In this situation, the team shortlists a few banks per the clients’ requirements and moves on to the next step.Step#3: At this stage, the amount of debt is decided, and the terms of the debt are finalized. The team offers debt between 2% and 10% interest rates in most deals.Step#4: Once the debt terms are decided, the team would negotiate with the team that is being shortlisted to participate.Step#5: Once the debt terms are finally decided upon after negotiation, the bank/PE firm returns to the credit committee for approval.Step#6: Finally, once the deal is approved, it is time for the team to go to equity investorsEquity InvestorsAn equity investor is that person or entity who contributes a certain sum to public or private companies for a specific period to obtain financial gains in the form of capital appreciation, dividend payouts, stock value appraisal, etc.read more and draft loan documents. At this moment, the clients have already agreed to the debt terms; even if there is a need to change the terms, it is almost impossible to do the bidding.

So, you can understand that the project finance team always does not come to the advisor/banks. But, the banks/firms also create a deal and reach out to the project finance teams.

Work-life balance in Project Finance

Compared to investment banking, you need to work fewer hours. However, you will be working 60 hours-70 hours per week in most cases. That means you would have a lot of time for family.
Many people choose project finance for its healthy work-life balance. But many people move on to other domains after a few years of work in the project finance domain.

Salary

Professionals with 2-3 years of experience in corporate finance or handling M&A deals go for a project finance profile. However, as the project finance profile is quite complex, it is almost impossible to control the deals and technical meetings without prior knowledge.

Compensation is an important issue for every professional.

Let us look at the payment structure of Project Finance Analysts in the US as per payscale.com: –

As you can see, the US salary for a Project Finance Analyst is more than $60,000 per annum, which is quite decent.

Let us look at the comparison of the salaries of other related jobs as well: –

From the above comparison, it is clear that the compensation structure in the project finance from the above comparison, it is clear that the compensation structure in the project finance domain is much better than any other stream. So, investment banking jobsInvestment Banking JobsThe investment banking job description is a formal narrative that lists out the essential qualification, basic skills and technical skills required in a candidate to fill in the vacant investment banker position. It also explains the roles and responsibilities to be performed in this job position.read more pay much more but look at the work hours.

Finally, let us look at the gender division and the effect of experience on the salary of a project finance analyst in the US: –

Most project finance professionals work in the experience bracket of 1 to 4 years from the above graph. After a while, most project finance professionals move on to other domains.

How to think on your way to a great project finance career?

Here are a few strategies you should consider: –

Shift your paradigm: Thinking is a skill. But here, we are not talking about thinking as a skill but about your ability to change your mind. For example, think again if you feel “lending” roles value project finance. Lending does not yield good returns, and you would not get as much weight as you want in lending roles. Try advisory. You will be able to work with great technical teams, learn a great deal about modeling, and also be able to close multiple deals by thinking long term and by working hard.
Think fund over bank/firm: A fund is important in project finance, not the firm/bank. So instead of thinking that you would join a bank/firm, believe that you would enter a particular fund; because funds are more dynamic and savvier than a project finance bank.
Do not get caught up in project finance: Project finance is one arm of an entire operation. So, do not get caught up in the concept of project finance. For example, you can work in export finance structured leasing, and they take the same skill sets to be precise.
Think long term: If you want to get into project finance, instant gratification should not be your thing. You need to think for the long haul and forget about yearly bonuses and compensation at the end of the year. Because if you do, you will never be able to stick to project finance for a very long period. Think about deals and close them as early as possible. The money will come as a result.

Conclusion

As a profile, project finance is quite good. From payment structure to work-life balance, project finance pays off really well. But instead of choosing “lending” roles, try to go for “advisory” roles for learning and growing in the project finance industry.