making decisions about risk and investment in mitigation banking
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A P R E S E N TAT I O N BY B E N G U I L LO N
MAKING DECISIONS ABOUT RISK & INVESTMENT IN
MITIGATION BANKING
RISK & INVESTMENT IN MITIGATION BANKING
WHY IS IT SO IMPORTANT?
Mitigation banking is a green investment.
Rewards are uncertain.
RISK & INVESTMENT IN MITIGATION BANKING
WHY IS IT SO IMPORTANT?
Mitigation banking is a green investment. Rewards are uncertain.
How do I decide if it’s right for me?
Determine your ability to take risk.
Review the risk factors.
Identify tools to understand financial
risk.
Manage and mitigate risk.
Anticipate the role of regulators.
RISK & INVESTMENT IN MITIGATION BANKING
APPROACHING THE PROBLEM
Will you need the money that you have invested by a particular date? Can you afford to lose this money? If you don’t achieve your return objectives, will that change your life plans? Will you rely on revenues from your bank for your day-to-day expenses or for your retirement? What happens if you can’t pay back the bank or your equity partner?
RISK & INVESTMENT IN MITIGATION BANKING
ABILITY TO TAKE RISK
Define the type and level of risk you are comfortable taking.
sophisticated: return volatility | discount rates | IRRother metrics: maximum exposure | bankruptcy risk | profit & loss at key dates
RISK & INVESTMENT IN MITIGATION BANKING
ABILITY TO TAKE RISK
The measure of risk should be tailored to your needs.
Regulatory Risk
Delays in regulatory reviewChanges to regulationEnforcement costs
Market RiskDemand changesCompetition from other banks
RISK & INVESTMENT IN MITIGATION BANKING
REVIEW THE RISK FACTORS
Operational RiskSuccess criteriaTime and costsCash flow
Financial RiskLeverageShort term capital
RISK & INVESTMENT IN MITIGATION BANKING
RULES OF THUMB
Revenue MultiplierRevenues should be X times the total costs
Credit PricesBe sure you know the minimum credit price you need
to make the project pencil out and make sense for you
Pro FormaHelps to understand costs, cash flows, and projected profits over time
$3,000,000
- $1,500,000
$1,500,000
RISK & INVESTMENT IN MITIGATION BANKING
RULES OF THUMB
= 60 credits * $50k/credit (necessary credit price)
Total cost of project = (land + entitlement + construction + maintenance + misc)
Project profit, with a revenue multiplier of 2x
RISK & INVESTMENT IN MITIGATION BANKING
EXAMPLE PRO FORMA
Upfront Costis high due to the significant investments in land, entitlement & construction
RISK & INVESTMENT IN MITIGATION BANKING
EXAMPLE PRO FORMA
Slow profitscan be expected due to the initial investments and time it will take to sell credits
RISK & INVESTMENT IN MITIGATION BANKING
EXAMPLE PRO FORMA
Availability of cash reservesis an important consideration in any mitigation banking project.
Cash reserves have dropped into the negative in our example.
RISK & INVESTMENT IN MITIGATION BANKING
RULES OF THUMB
Rules of thumb are a great first step in assessing risk, but you must go a step beyond…
RISK & INVESTMENT IN MITIGATION BANKING
SENSITIVITY ANALYSIS
1 2 3 4 5 6 7 8 9 10
$(200,000)
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Cash ReservesStarting a project with different amounts of cash will have a drastic
impact on your reserves throughout the project life cycle.
RISK & INVESTMENT IN MITIGATION BANKING
SENSITIVITY ANALYSIS
Regulatory Delayswill have a dramatic impact on any project. Here we’ve assumed a $600,000 cash reserve, a 1-year delay, and a 2-year delay. The chart shows the impact
of delays on your cash reserves throughout the project.
1 2 3 4 5 6 7 8 9 10
$(600,000)
$(400,000)
$(200,000)
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
No delay
1-year delay
2-year delay
RISK & INVESTMENT IN MITIGATION BANKING
SENSITIVITY ANALYSIS
Alter the variables on your pro forma so you know what you are up against. Be conservative.changes in credit prices | escalating construction costs | regulatory delays | drop in credit demand
differing financial structures | changes in financial reserves | taxes | financial insurance | endowment
RISK & INVESTMENT IN MITIGATION BANKING
SENSITIVITY ANALYSIS
Manage your risk appropriately.Don’t invest if it doesn’t feel right. Reassess your risk regularly and cut your losses when needed. Some things will definitely stray from your original plan – use a safety margin. Mitigate the risks you take and keep your options open. Share the risk with financial partners, landowners, and consultants.
Diversify, diversify, diversify.
RISK & INVESTMENT IN MITIGATION BANKING
SENSITIVITY ANALYSIS
Presentation byBen Guillon, Director, Mitigation Banking and Environmental Finance
email [email protected] 415.454.8868 x151