Green Investment

Bank Acquisition
Simulation game

Bright Network July 2021

STRICTLY CONFIDENTIAL
The Green Investment Bank

Overview
The Green Investment Bank (“GIB”) was created by the UK Government in Track record of c. 100 direct and indirect
October 2012 to invest capital in the UK green infrastructure sector investments
• Target sectors: Energy Efficiency (“EE”), Waste and Bioenergy (“W&B”),
Offshore Wind (“OSW”), and Onshore Renewables (“OR”) £3.4bn in commitments to the UK’s green
economy
• Flexible capital: Ability to invest in equity and debt

• Build a team of the industry’s leading talents including 80 investment

specialists in a wider team of c. 130 personnel Investment size ranges from £6m to over £300m

• Raised and managed the largest renewable energy fund in the UK: the GIB
OSW fund (£1.1bn AUM) Involved in c. 60% of all transactions in GIB core
markets (offshore wind, waste & biomass)
 01
Positioning the
opportunity
STRICTLY CONFIDENTIAL
Scenario 1: Positioning the
opportunity
Indicative bids
When a seller is looking for a potential acquirer, they will often ask for an “indicative
bid”, where interested buyers give a general indication of interest and pricing based
on current information available.

Characteristics of an indicative bid:

• Indicative bids are generally legally non-binding, however in order to

demonstrate reliability to the market, acquirers should nonetheless provide a bid
on good faith based on the information available.

• Information available is usually preliminary, and as such preliminary offers

are typically contingent on acquirer due-diligence confirming the information that
the seller has provided.

• Because of the need for due diligence, preliminary offers generally involve an
upfront cost that interested parties will incur, even if the deal falls through or
they are not selected as preferred bidder.
Scenario 1: Positioning the
opportunity
The scenario
In April 2016, it was made known that a buyer was sought for the acquisition of over £2bn in Green assets via the privatisation of the
Green Investment Bank. This was a substantial transaction both in size and complexity, yet offers were due by July 2016.

While interested in the assets, Macquarie did not immediately have the resources on hand to go forward with a deal of this magnitude
and complexity. However, successfully achieving preferred bidder status and then closing the deal would be a landmark opportunity for
the business.

What should Macquarie do?

A. Request an extension to the bid date.

B. Place a bid only for certain assets out of the greater portfolio.

C. Attempt to form a consortium.

 02
Consortium formation

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Scenario 2: All for one &
one for all
Consortium formation
In large, complex deals, it often makes sense to form a partnership with additional
investors in order to maximise the strategic impact of an acquisition.

Benefits of forming a consortium include:

• Closer strategic alignment of interests as you can negotiate to acquire only the
assets that best fit your organisation’s capabilities and future goals

• Mitigation of risk by not overinvesting in one deal, entity, asset class, etc.

• Alignment with the public interest by bringing in co-investors whose interests

balance those of your organisation
Scenario 2: All for one &
one for all
The scenario
The Green Investment Bank acquisition was a large and complex deal, subject to high levels of public interest due to the fact that the
entity was publicly owned.

Macquarie is considering approaching potential partners to co-invest in GIB assets.

What should Macquarie do?

A. Approach Partner A: Partner A is a pension fund, in other words they invest public sector employees’ retirement savings with a
long-term strategy in mind.

B. Approach Partner B: Partner B is what is known as a strategic investor, for example a utility firm with a strategic interest in assets
with generation capabilities.

C. Approach Partner C: Partner C is a sovereign wealth fund with a desire to appoint Macquarie lead financial advisory processes for
the eventually co-owned assets.
 03
Bid strategy

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Scenario 3: The Price is Right

Negotiating a purchase price

At the core of any negotiation over price is really a negotiation over the value of an
asset or portfolio of assets.

The buyer and the seller will have competing interests:

• A seller will take the position that its assets are profitable and stable, ie that
as many risks as possible have been identified and either mitigated or
eliminated

• A buyer will try to identify any unmitigated risks and try to convince the
seller to either 1) implement stopgaps prior to the sale of the asset or 2)
reduce the sale price so that the buyer can implement its own risk mitigation
strategy

At the heart of any investment is a process by which an acquirer tries to identify

whether the anticipated rewards of the transaction are commensurate with
the risk.
Scenario 3: The Price is Right

The scenario
The GIB portfolio is characterised by assets at mixed stages in their lifecycles. Some assets are operational and working well; a
number of GIB assets are still under construction; additionally, some assets are still in “pre-construction” phase, meaning a
number of permits and contracts have been signed but no tangible asset actually exists yet.

For a handful of assets, the UK Government puts forward an offer price that reflects confidence in the fact that these assets will by and
large reach a stage where they are generating healthy and stable returns.

Macquarie however disagrees with the valuation. After lengthy conversations, neither party is budging on their price for this segment of
the portfolio.

What should Macquarie do?

A. Hire specialists to develop the assets in question in order to increase value.
B. Accept the offer price given that, at a portfolio level, the price is still acceptable.
C. Implement an alternative risk mitigation strategy for the assets in question (suggest one if you choose this option).
 04
Financing

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Scenario 4: In the money

Financing an acquisition
In basic accounting, we’re taught that “assets = liabilities + equity”; in other words, Debt Equity
assets can be funded via debt, capital investments, or a combination of both.
Less expensive (though it
gets more expensive the More expensive
Liabilities (debt) and equity (capital investment) have different characteristics, more you have)
benefits, and risks.
Company defaults if it
No default if dividend
cannot make agreed
• From the perspective of an asset owner, debt is a less expensive form of interest/principal payments
payments aren’t made
funding for two main reasons:
• Interest payments often carry tax deductibility benefits
• Debt is generally less risky for lenders/investors than is equity

• Why is debt less risky from the perspective of the entity providing financing?
Principal and interest payments are agreed in advance, and a borrower has a
legal obligation to make those payments on time or risk bankruptcy.

The risk/reward tradeoff between debt and equity is a primary discussion point
surrounding many transactions.
Scenario 4: In the money

How does Project Finance differ from Corporate Finance in terms of:
Timeline Modelling techniques Debt financing considerations

• Length • Periodicity • Leverage

• Terminal value • Level of detail • Margins
• Focal point of the valuation • Legal / commercial terms
 05
Hypothetical Valuation
Exercise
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Scenario 5: Disaster Strikes!

Valuation responding to real life events

Valuation is the art of finding the “fair” price to pay for something, based on the
facts you have available at the time

These facts may change over time, and valuation should respond accordingly:

• If financial projections are affected by the change in facts, the expected

profitability of the assets may be impacted with a corresponding impact on
valuation

• If the riskiness of the assets is affected by the change in facts, then the rate of
return required by an incoming investor will similarly be affected

Valuation models (and the analysts building them!) need to be nimble and robust
enough to respond to real life events that may change fundamental things about
the investments. Unexpected things sometimes happen!
Scenario 5: Disaster Strikes!
The (definitely hypothetical) scenario
Macquarie and the UK Government have agreed a valuation of £1bn on the Green Investment Bank’s prized asset, Supermassive Made-up Offshore
Windfarm.

But two days before Macquarie’s acquisition of the Green Investment Bank is due to be signed, a group of pirates take control of the seas around the
Offshore Windfarm, meaning that maintenance ships will be less reliable if they needed to carry out repairs.

Supermassive Made-up Offshore Windfarm

• Is still expected to generate the same amount of electricity (3 million units a year) and achieve the same price for those units (£100 per unit), and
is still expected to have the same operating profit margin (75%) and tax level (20%). There is no debt
• Is still expected to operate for 10 years from the date of acquisition
• Is now more risky because if something goes wrong there is no guarantee of repairs

Macquarie and the UK Government therefore agree that the rate of return to be achieved by Macquarie should be higher by 2%.

What is Supermassive Made-up Offshore Windfarm’s new valuation?

Hints:

A. First find the originally expected rate of return implied by the £1bn valuation using Excel’s IRR function

B. Then find the new valuation at the new rate of return by using Excel’s NPV function (note, NPV function assumes first cashflow happens in 1 year)