Since the early 1980’s, John Jaffray has been working in financial markets of all types. He has seen many financial cycles, beginning with the long bull market in bonds that began in the first quarter of 1981.
Understanding cycles can lead to excellent opportunities. His current focus is on development and operating solar assets. His thinking is outlined in the ten principles below:
1 - The solar cycle began in 2009 and continues today.
The explosion of the US solar markets began in 2009 and has grown from 1,000 MW to 55,000 MW in 2018, representing over $130 billion in total investment.
2 - There are three broad categories, residential, “C+I” and utility scale.
Each category represents perhaps a one-third share. (We care about C+I.)
3 - There are good opportunities in each, but one must focus. Ours is C+I.
C+I is more difficult to aggregate, hence the values are better.
4 - The characteristics of the assets are attractive, both on an absolute and relative basis.
Most assets are contracted long-term, many to investment-grade counterparties, such as schools. On a relative basis, because of the structural complexities, the markets clear (or trade) roughly 400-500 basis points higher (better) than comparable assets classes.
5 - Risk-reward factors are favorable.
From a standard deviation or Sharpe Ratio assessment, a diversified portfolio of operating assets provide a higher return and lower risk than almost any other asset.
6 - Our background is in markets – a market-making approach is what is required here. Given the structural nature of C+I, bidding for assets in multiple markets provides the visibility and market knowledge to get and use the required competitive edge. An effective market-maker (in any market) shares similar capabilities, including a functional back office, capital commit “on the desk”, effective asset management capabilities (largely software) and a remarketing syndication (to sell yield through).
7 - The “space” is ripe for rationalization.
New markets are often “vertical” and move towards “horizontal” as they mature. Early in any market cycle there is enough margin to overlook inefficiencies. As time passes (in a cycle), competitors find profit opportunities in a spot, and gain market share by serving that slice. Given the large number of projects (in the solar market), there is a huge opportunity to rationalize operations, administration, procurement and insurance costs.
8 - The overall available market (for investing) will grow substantially over the next five to seven years.
All solar development in the US since 2009 has a tax component, limiting the ability of owners to sell their cash flows for five years (“recapture”). This creates a lag effect (of five years). As a result, the actual market, today, might be 7,000 MW. Taking account of the above-mentioned lag, in five years the market opportunity will grow to 55,000 MW, or $100 billion. C+I, then would be $30 billion.
9 - The yield and return in the asset class is “cheap-to-the-market” and therefore attractive to institutions.
Contracted, established cash flows should NOT be trading at 10%. As a result, our ability to aggregate assets suggests we should be able to remarket those cash flows (while keeping an asset management responsibility) for institutional investors and make an excellent gain-on-sale, while earning high, recurring cash flows.
10 - Our markets background and relationships in the US present an opportunity to capture market share.
We have been in markets since 1981, and in power markets since 1995. Understanding these markets and having relationships across the US will help us the grow and capture market share.