Creating Liquid Public Private Partnership (3) Projects
Start up Public Private Partnership (P3) typically starts with credible professionals who seek opportunity. Often competent professionals find bid opportunities. During a career it is natural to seek your next challenge. Locating the challenge may be the simple part of your career.
Often liquidity providers are not plugged in to local governments. An institutional bank's business is not engineering. Bankers are not lobbyist. Financial arms do not create policy to improve a host country. Banks are stakeholders and financial partners. It is important to assess stakeholders. Approach each in a manner they understand.
Often clients will advise us of alternatives they have. These alternatives often have the word "Hedge Fund", "Private Investment Group", "Trade Platform" or "Bank". At times these alternatives may feature certain syndicates that appear credible.
The most important factor to consider is understanding the financial qualifications for institutional parties. Financial parties have risk tiers that prevent investment into entities that lack basic infrastructure, capital solvency and professional certifications.
Let's start with understanding the alternative parties and what each one requires. Each party is different and requires its client to fit a certain profile. Soul searching is not required to assess your personal situation.
A hedge fund is a private or publicly listed Limited Partnership that is organized to take advantage of opportunities based on an issued prospectus. These entities are organized in two manners.
A Reporting Entity and a Non Reporting Entity.
Hedge fund managers are often regulated by the state in which the hedge fund manager conducts business or by the SEC, depending on the manager’s assets under management (known as “AUM”). Hedge funds themselves do not register, although there are increased reporting requirements for funds themselves as a result of the 2010 Dodd-Frank Act. A hedge fund manager may be required to register as an investment advisor with the manager’s home state, although registration requirements and available exemptions vary from state to state. A hedge fund manager is not eligible for registration with the SEC until the manager has greater than $25 million in AUM. Many states have recently adopted exemptions for investment advisors that only advise private funds (i.e., hedge funds and similar privately offered funds). These “private fund advisor exemptions,” as they are known, often restrict the investors that the hedge fund may accept and may include other requirements, as well. Navigating the state registration rules is complicated and will generally require the assistance of a hedge fund attorney with experience in state investment advisor regulations.
In summary a Reporting Entity typically has more than 25mm in Assets Under Management and a Non Reporting Entity typically has less than 25mm in Assets Under Management.
The key feature in this option is the "restrictions" governing the class of investors. The class of investors are limited to special types. Investors that organize themselves in a manner capable of understanding something as complex as a Public Private Partnership (P3) are typically Qualified Institutional Buyers (QIBs).
If a private non reporting hedge fund is furnishing you an option 1) You know the entity cannot have more than 25mm, 2) the hedge fund manager is not subject to any oversight, 3) there is limited options for flexible options, 4) the hedge fund is operating as part of a syndicate.
All these items require prospectus that govern their investment allocations. Firm investment parameters are set in place before you show up. This means that investment grade or non investment grade language, region, reinvestment options, and benchmarks are pre-established.
Seldom will any QIB approve an investment into any entity that has 1) Net Asset Value less than 10% of its requested amount 2) Has less than 5% of liquid assets to contribute, 3) has failed to pay for items such as: permitting, domestic incorporation, accounting fees, et cetera and 4) Failed to Receive a Request For Proposal (RFP) or Tender from host government.
Nearly 99% of entities that receive investment from Hedge Funds for P3s have this material. If you are not in this position be wary of any offer.
Private Investment Groups
Private Investment Groups solvent enough to participate in this structure are typically organized as Family Offices. Private Investment Groups not members to Family Office associations, non attorney led, and non investment professional (certified to adhere to ethics and policies of governing bodies) sport low success chances.
Private Investment Groups that manage capital employ competent professionals to 1) protect their capital, 2) give solid investment advice, 3) cover their activities under Professional Error & Omission Insurance, & 4) limit exposure by implementing solid hedges.
Private Investment Groups in principle never expose capital in unrecoverable assets or insufficient income assets. Typically the ability to liquidate is the concern with Private Investment Groups.
Typically Due Diligence for Borrowers or Investment Entities is more stringent and terms less attractive. Design Build Finance & Transfer are typically acceptable. The value on contract is paramount. Guaranteed streams of income are typically the only arrangements accepted by Private Investment Groups.
Appreciation, market sale and other items are valued less. Private Investment Groups are the option for individuals who: 1) Have Net Asset Value less than 10% of its requested amount & 2) Have less than 5% of liquid assets to contribute.
The key feature to this option is that principals must: 1) have won a Tender or Request for Proposal, 2) Have permitting, local incorporation, concessions in place, 3) Executed a Memorandum of Understanding (MOU) with accompanying Revenue Document (Power Purchase Agreement, Toll Concession Tariff, et cetera).
Banks are the most conservative option. Options are subject to commercial underwriting and credit committee approval. As a project principal the most basic question to ask is, "Am I considered a Wealth Management Client?"
If the answer starts with no...then the likelihood you have tangible banking options is akin to Iran being taken off the sanction list before giving up its nuclear program.
Many things are possible but these same things are highly improbable. The purpose of any bank loan is to reflect the bank's credit rating in the loan portfolio. If you are unfamiliar with credit ratings it is important to understand. Banks do not obtain AAA credit ratings by making loans to individuals that do not have significant net worth and asset value "prior" to asset purchase.
Loan applicant profiles must be 1) very low risk, 2) typically reflect a personal financial statement (PFS) of 3-5% of loan value (sometimes up to 10%), 3) have personal income requirements to reflect Accredited Investor definition ($200,000 individual $300,000 household), and 4) if self employed have businesses with revenue in excess of 1mm USD per annum (for 3 consecutive years).
Some could argue lower investment grade banks are more stringent. The reason for small bank stringency is bad loans will cause financial regulator scrutiny. Approaching a small bank is not always the best option when searching for creative ways to capitalize your P3. Often smaller (or non investment grade banks) will require liquid collateral (such as Stand By Letter of Credit or Bank Guarantee) to facilitate their loan.
Smaller banks or Non Investment Grade banks will grant the most pre-concession documentation; however will create conditions more difficult than top tier banks.
Often term sheets, approval letters, and other items will stipulate items such as high underwriting fees, closing fees, and cash equivalent collateral. Often the cash equivalent deposit is required to deposit in the institution prior to funding.
The reason for this is simple..."Banks that are smaller do not have the balance sheet or solvency reserves to facilitate your loan".
This is not an issue. Your lack of financial standing often makes the bank a partner; however, it is important to note you are simply asking for a consignor. You need a consignor due to your lack of track record / assets / credibility.
Trade Platforms are not project funding conduits despite their prevalence of application in project funding. Trade Platforms are individuals, entities and persons who engage in speculation to achieve returns that are very high. Often these entities will engage in asset classes that produce: 1) volatility, 2) margin, 3) closed end transaction(s) or 4) futures. The returns for these transactions can be high. Often the mechanism (despite its inherent risk) can achieve project goals.
These mechanisms are not always 100% successful and require proper risk mitigation for failure.
Trade Platforms are innovations created for individuals who fail to meet the requirements of 1) Banks, 2) Hedge Funds, 3) Private Investment Groups and 4) Family Offices.
These unique mechanisms work by taking positions in various asset classes that capitalize on short or long markets.
In most cases liquidity is actually capped despite the high deposit claims. There are various reasons for this but the primary reason centers on trading being "counter party". In every increase there is a decrease. In every win there is loss. In order to achieve gains another account must achieve loss. The loss is centered on liquidity providers and not transacting parties. Liquidity providers have data analysis software designed to locate high success chance loses and stop positions. Too much gain means a stop to operations and termination of contract. No contract means no returns. No returns means loss or failure to transact.
There is no guaranteed rate of return. The high success chances of weekly / monthly / quarterly payouts are determined by proper risk matrices and exposure rates of principal balance. Margin trading is the sure way to lose ground, failure to maintain open positions and recipe for capital loss.
The key component to this structure is money is required. You cannot participate in this structure without significant capital. Due to draw down strategies and institutional lot sizes (where success is higher due to non margin) it is typically unfeasible to deploy these strategies with less than 1mm USD.
When analyzing alternatives it is important be realistic. Projects are entrusted to individuals who showcase low to moderate risk. There is no source of money looking to entrust a million dollars to a bank account that has never discovered a deposit so large. Private Investment Groups are the most likely target. The catch is that the contract must be in place prior to investment. Factoring likely revenue is not a difficult decision to make.
Obtaining a contract prior to significant capital support is difficult. It is for this reason that Private Investment Group options feature low odds.
High odds exist with Banks and moderate odds with Hedge Funds. Both options require net worth, proven track record, and sizable liquid resources.
Risk structures consist of trade platforms. Odds can be low or moderate depending on the sophistication of the principal. Often a sophisticated person is typically in position to take advantage of high to moderate conduits without risk exposure of trade platforms. Therefore participation of sophisticated persons is low.
Qualifying for P3 Structures
The only high odds alternative to properly approach a P3 concept (without requirements above) is to structure for retail. Retail is a path with 1) Accountability, 2) Transparency, 3) Ease of Liquidity, and 4) Professional Assistance. Budgeting is typically $150,000 - $250,000 plus registration fees.
Undergoing a structure path to list a private security on an affordable public exchange (such as Bermuda BSX) is a manner to raise the seed capital required to be considered serious for a P3 route. If the budget size turns you off think about what you are asking of yourself.
"Would you invest 10's of millions of dollars into a person who has failed to invest less than 1% of what they ask to be structured properly?"
How would you respond to this question? It is important to never appear weak, negotiate from a position of incompetence, or worst confront a winter storm with a T-Shirt as your only source to shield you from cold. These are all foolish positions to take as they have odds that are significantly high in failure.
Often individuals romanticize about projects but do not gain prospective. Despite the operational proficiency, the financial component must be factored. The difference between a project principal and project manager is determined financially. Sound financial structures require serious comprehension. Analyzing a deal from a financial vantage point is the requirement of success.
Financing is the inhibitor to the majority of P3 deals and financial instability of its principals is the catalyst of its financial implosion.
Understanding how your financial stakeholder thinks is important. Failure to communicate on grounds your financial stakeholder understands results in road blocks, failed progress and project failure. Have a free consultation with Knight Advisory & Planning (KAP) to discuss viable paths forward. KAP specializes in seed structures for competent professionals who have mastery and direct government relations. Don't misappropriate time and discover today by submitting an application how to work your P3 partnership.
Knight Advisory & Planning (KAP) is the only company to primarily focus on Public Private Partnerships (P3) since 2006. KAP operations are spread across countries of the world to serve this need. KAP Network consists of core partners surrounded by interlocking networks of consultants and affiliates in key trading countries and disciplines. We maintain Master Project Manager (MPM) who are American Academy of Project Management (AAPM) certified and are experienced in the following industries: construction, development, finance, technology, FinTech, biotechnology, production, R&D, and manufacturing. With over twenty (20) years of experience let us guide you through the P3 process.