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Banking Careers – Project Finance

In Investment Banking by Gaurav SharmaUpdated On:

Project finance is an exciting and challenging career that offers an opportunity to young professionals to develop the analytical and quantitative skills necessary to excel in banking. With a healthy work life balance and lucrative pay packages, project finance exists right smack in the middle of the goldilocks zone for most young professionals.

1. What is Project Finance?

Project finance is the funding of long-term projects using an off-balance sheet financing structure. What this essentially means is that the debt and equity required for funding a specific project is transferred to a Special Purpose Vehicle (SPV) by the sponsors of the project. The cash flow generated by that specific project is then used to pay off the debt, expenses and finally for issuing dividends to the sponsors.

1.1. Why use project finance instead of corporate finance?

There are certain projects which are deemed too risky, too different or too large to be housed in the balance sheet of the main sponsor. For example, consider a scenario where a company is building a large multi-billion-dollar airport. In case the airport is not successful, that company could take a serious hit on its balance sheet which will affect its other businesses and projects as well. Furthermore, lenders and creditors would also have recourse to the assets of this company. But by creating a special purpose vehicle which is a separate entity, the main sponsor limits its risk to the amount that it invests in the SPV. Thus, project finance helps in the isolation and packaging of risk.

Projects which are financed this way are usually long-term – like infrastructure, housing, utilities and so on. There are some cons to project financing as well, a much higher cost of funds for one. But for most large and long-term projects infra projects, the pros outweigh the cons.

2. Job Description for Project Finance

The responsibilities of project finance analysts and associates may be divided into three broad categories: origination, structuring and monitoring.

2.1. Origination

The first part of the job is all about securing the right projects. This is usually done by preparing pitch books, making advisory proposals, marketing material and responding to specific client enquiries. Depending on the workload, a large portion of a project finance professional’s time might be spend performing such origination activities. Senior level project finance executives would also be expected to cultivate relationships with clients directly or in partnership with the various client coverage teams.

Banks often structure their project finance teams based on specific sectors of the economy that need to be covered. For example, there might be a project finance team covering infrastructure and utilities, another covering real estate and a third one for government projects and so on. Analysts and associates would usually perform activities like preparation of the pitch books and other marketing materials. While the more senior and experienced professionals at the director or MD level would focus on the client management and relationship aspects.

2.2. Structuring

Deal structuring in project finance involves a complete analysis of the project including all expenditures, cash flows, risk factors, mitigation, collateral, due diligence etc. Loan documents and other regulatory paperwork must also be completed. This part of the job involves liaising with the client for the information, the credit risk department for completing the approval process, and the legal department for finalizing any and all contractual documents.

Analysts and associates are expected to do most of the heavy lifting here and need to possess the right modelling and quantitative skills. This is often the most stressful part of the job especially since the quantum of the deals is so large and the value at risk can be significant. Each project is different and therefore requires the analyst to continuously learn and master the intricacies of each project. Some amount of travel in the form of field visits or client interaction is also expected.

For the largest projects, there is no single bank which underwrites the entire risk. Therefore, these deals are syndicated and multiple financial institutions participate in funding such transactions.

2.3. Monitoring

Once work of the project actually begins, so does the process of active risk management. There might indeed be several projects that need to be monitored on a continuous basis. This includes monitoring specific components or performance metrics in order to identify any signs of asset deterioration. There are also more detailed credit reports that need to be prepared on an annual basis or whatever frequency is deemed necessary based on the risk of the project.

This part of the job is unique in the sense that the bank not only looks at one specific project, but also at the collective project finance portfolio of various projects taken together.

3. Qualifications & Skills

The skill requirements for the project finance roles at the analyst/ associate level are quite similar to those in investment banking or credit analysis. There are, however, some unique considerations that need to be covered.

Modelling and analysis – This is going to be your bread and butter for the first several years. Analysts and associates in project finance spend most of their days modelling and structuring project finance deals or preparing pitch books.

Project finance deals usually involve off-balance sheet funding mechanisms like a special purpose vehicle. In that sense, the modelling and structuring is somewhat different from traditional corporate financing options. The risk profile for these deals can be significantly higher, the collateral structure is usually different, and the projections can also be more “sensitive”. Considering all these factors, project finance modelling is more unpredictive and prone to fluctuating variables than on-balance sheet financing options.

Sector specific knowledge – Where project finance differs most from other banking roles is in terms of the sectors and projects that are usually financed. Project finance is mostly used to finance long-term capex heavy projects like infrastructure, utilities, real estate and so on. Therefore, having an understanding of these sectors is crucial to success.

This also means that analysts and associates usually learn a lot of technical modalities with respect to the sectors that they are covering. For example, the cash flows in a residential housing complex would be quite different to cash flows in a public utility project. Analysts will have to learn the ins and out of each of the sectors that they are required to cover.

Dealing with governmental and international bodies – Many project finance deals involve the government or other developmental entities and dealing with them requires a special skill set. The pace of decision-making in such entities can be quite different from what you might be used to in the private sector. The process is also more formal with more paperwork, more to and fro in terms of pricing and structuring and usually the need to deal with several stakeholders.

Working with uncertainty – Although it is impossible to predict future events, most banking roles require analysts to perform some sort of projections. In corporate finance, this usually means taking the historic and current numbers and extrapolating them based on reasonable assumptions. But this can be very hard for new companies like start-ups where the operations are nowhere close to having stabilized yet. This is true for project finance as well as each project is its own beast with its own unique traits and a distinctive set of challenges and opportunities.

Analysts and associates working in project finance must spend more time looking at past deals in order to justify any assumptions that they are making for any ongoing deals.

Communication and presentation – Project finance analysts spend a great deal of time preparing pitch books and other marketing material for prospective clients. Additionally, the analyst would also be liaising with internal and external stakeholders like credit teams, syndication partners, legal teams, coverage teams, client departments and so on.

At the analyst/ associate level, this communication would be at the operational level for the most part. However, as you rise through the ranks to VP, director and managing director levels, the conversation takes a more strategic turn.

Collaborative attitude – The projects that are funded through project financing are usually massive undertakings involving dozens of stakeholders including financiers, legal firms, contractors, subcontractors, governmental agencies, regulators and so on. Working with all of them to ensure that the financing aspect as well as the risk management is taken care of, is the responsibility of the project finance team.

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4. Building your Resume for Project Finance

If you want to build your CV for a project finance role, you have to essentially focus on two broad areas.

The first focus area is modelling, analysis, structuring and quantitative skills. Undertaking projects and courses which involve these skills as part of your college curriculum would be helpful. Real-world experience, even if at a lower level, is always valuable. There are number of off-line and online courses that you can take specifically polish your project finance skills.

The second focus area is domain or sector specific experience. For example, if you know how everything about how commercial real estate works, then that knowledge will be very helpful when you are structuring a commercial real estate financing deal.

4.1. Academics

Project finance roles require quant-heavy degrees. Business, economics, engineering, physics etc. are all viable options. If you have an undergraduate degree, you would be joining at the analyst level. However, if you have an MBA then you should expect to join at the associate level.

My personal advice to everyone is to always try and join at the associate level in order to minimize the unprecedented amount of grunt work that is expected of you at the analyst level. However, that is not always possible and if that is the case, you must put in the time as an analyst for about three years before you graduate to an associate role. As you move through the ranks your hours improve, your salaries increase and the quality of the work that you do improves substantially.

4.2. Courses & Certifications

The New York Institute of Finance offers the best and most comprehensive certification for Project Finance professionals. The course covers evaluation of projects, risks, deal types, documentation, legal aspects, syndication, modelling and plenty of highly relevant case studies. It takes about 15-20 hours and is completely online.

I not only recommend this course for those looking to get into Project Finance, but also to interns or entry-level Project Finance professionals to really boost their understanding of the industry and get noticed. In addition to the learning, certifications like these indicate your interest in and commitment to the field.

If you would like to learn more about this course and others for Project Finance, check out this article:

Best Project Finance Courses (2020) ranked by Bankers

5. A Day in Project Finance

The daily routine for project finance analysts and associates depends upon how many active deals they are currently working on. If there are deals that are at a very active phase, then the analyst would probably be spending most of their time on those deals. However, there is often some downtime when deals are either just dragging on or the transaction volume is low. Either way, the typical day would look something like this.

First order of business would be to clear any urgent email requests. These could be queries from the client, internal stakeholders or external vendors. If there are any active deals in the pipeline, then it is highly likely that there is plenty of work for the analyst to do. Otherwise, your supervisor would probably have you working on some pitch or other origination efforts.

Project finance analysts and associates also need to spend time monitoring existing deals. It is possible that in some banks this monitoring work is performed by a separate team which is different from the origination team. If that is the case, then the work is divided between these two teams. Otherwise, detailed appraisals need to be performed on a preset schedule and credit covenants must be tracked on a daily basis.

Lastly, there are dozens of “housekeeping” activities that need to be performed. These include things like completing trainings and certifications, attending industry functions and seminars, building relationships with other teams and stakeholders etc. Analysts and associates are also advised to spend a great deal of time learning the intricacies of the business from their more experienced peers.

5.1. Work Hours

The working hours for project finance teams are usually better than their investment banking brethren. The workweek is usually around 60 hours, but if there are multiple active deals then that can easily stretch to 80 hours or more. Project finance deals are often long and stretched out. Therefore, there is no immediate crisis-like situation most of the time in contrasts to investment banking activities.

Like with most banking roles though, young analysts usually spend some extra time in order to achieve more than the base minimum in order to stand out and be noticed!

6. Salary and Bonuses

Project finance analysts can expect to earn around $60,000 – $90,000 based on the bank they are working for, the size of the deals they are assigned to, location etc. Large, international banks usually pay better than smaller regional outfits. There is a bonus component on top of this as well which hovers around 30% to 50%. Salaries in Europe for similar roles are slightly lower than what they are in the United States.

Once you get promoted to the associate level, you can expect salaries in the range of $80,000 to $140,000. What’s more is that your variable component will usually be higher and range from 30% to 70%. All of this is heavily dependent on your actual performance, the performance of your team and how well your bank or financial institution is doing in the market.

Salaries in project finance tend to be lower than what your peers might be making in investment banking. But it has the benefit of having a much, much better work-life balance. In fact, if you calculate the amount of money that you’re making for every working hour, you might actually be a lot better off than your investment banking peers.

7. Career Path and Progression

Project finance is always in demand. Although it is a cyclical business tied to the overall economy, the participation of governments and international development bodies provides some anti-cyclical boost. Let’s look at some of the more obvious career choices first.

Option 1: Stick to project finance

This is usually the most common path for project finance professionals. Salaries are decent, the job is not soul-crushing, work life balance is good and there are plenty of opportunities for organic growth. What more do you want?

Analysts can get promoted to associates who then move on to become directors or vice presidents and finally on to managing director roles and beyond. At each stage, you get a decent bump to your overall compensation. At the most senior levels, your variable component can be several times your fixed salary depending on how much business you bring in for the bank.

Option 2: Move to Private Equity

There are many private equity funds that invest in project finance deals. These can be banks, international agencies, private funds, developer funds and so on. Those who work on several deals develop a very specific and niche skill set that is highly valuable for these private equity funds. When you move to PE, the compensation can be even more rewarding based on the performance of the fund.

Option 3: Perform an advisory role

You can also play an advisory role and help clients with their project finance deals. This obviously requires a lot of experience but is a viable option for very senior level executives. Your main responsibility here is obviously to provide your clients with the best possible deal structure and pricing for their specific requirements.

Option 4: The world is your oyster!

In case none of these options seem attractive to you, you still have a wide variety of choices based on the skills you develop over the years. You can move into a client coverage team if you have developed good relationships. You can move into credit analysis if that is something that appeals to you. You can move into debt capital markets if the right opportunities exist.

Having worked with a specific sector, like real estate for example, you can also get a very senior and high-paying job with a big developer in that field. These are all options that are available to you based upon your specific circumstances and the opportunities available any given point in time.

The gist of the matter is that the quantitative skills that you develop, the relationships that you cultivate, and the sector specific knowledge that you gain – are all priceless.

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About the Author

Gaurav Sharma

Gaurav started his career as a Corporate and Investment Banking intern at Citi in 2009 and eventually ended up as an Associate Director at Standard Chartered Bank’s Wholesale Banking division a few years later. By 2016, Gaurav was consulting FinTech start-ups in London with product development in the institutional banking space. He also advises mid-market Private Equity/ Asset Management firms and Banks in North America and Europe with investments in the financial services and FinTech sector. Gaurav writes on topics ranging from European Union banking regulations and FinTech to Blockchain startups and the inevitable rise of our AI overlords! He has an Engineering degree in Computer Science and an MBA with a double major in Finance and Marketing. He is also a Certified Financial Risk Manager.