Bret Kugelmass
So we are here today with Ralph Cho, the Co-Head of Power and Infrastructure at Investec. Ralph, thanks for joining us on the energy impact podcast.

Ralph Cho
Thanks, Bret. Happy to be here.

Bret Kugelmass
Yeah. So as we like to do, I'd love to start off with your background, how you became interested in finance and energy and infrastructure and see how you got into the space, or all the wonderful stuff.

Ralph Cho
So look, I've been in finance for a little over 25 years. And I tell you, as I say that it feels really weird. But, you know, I think the first five years of my life, I spent a lot of time in structured finance, doing things like mortgage backed securities and things like that, cutting up cash flows. And then after business school, you think that you're going there to kind of change your life to do something completely different, like management consulting, or something cool. But I ended up going right back into investment banking. I went to Credit Suisse. And I would love to tell you that I've been dreaming and all this stuff my whole life but that is not the case. I was actually thinking I would love to join private equity or do something, tech, I think might be your background, right? So I was thinking about doing something like that, but the way these incoming associate classes work is you just get slotted into a group. And they push me into the energy group, which is probably one of the larger groups at Credit Suisse. And I was one of the associates there. And I spent some time learning about the space and all the nuances and intricacies, went from Credit Suisse to another very large bank called WestLB. And then I started learning more about the capital market side of the business. And now here I am at Investec.

Bret Kugelmass
And when you say capital market side, can you break that out? What does that mean to the layperson?

Ralph Cho
So like when these banks do deals, and we're primarily lenders, right, the deal sizes climbed at, like $2, $3, $4, or $500, maybe a billion dollars. And so when we talk about capital markets, no bank wants to hold $500 million, right, that just doesn't exist. If you're an investment bank, you're going to sell everything. If you're a bank, like ours, we're going to hold a piece, maybe we want to put $25 to $50 million on our books. But then we got to go find friends $450 million worth of friends to go and pull into the deal that we structured and arrange and put together and hopefully find other partners that kind of have the same mindset has us in how we review the risk.

Bret Kugelmass
And when you say a partner and have the same mindset as you and how you view the risk, does that mean that you want to find, you know, just people to spread the risk among but that trust each other and all play the same role? Are you looking for different levels of risk takers, some that are more conservative, some that are more risky?

Ralph Cho
Completely depends on the situation, if you bring me a project and you say, Ralph, I've got a wind farm, it's gonna cost me $300 million to build, I'm gonna put in, you know, call it $100 million, I need you to give me $200 million. Well, that's going to be very straightforward based on what the risk profile the deal looks like, right? Let's say you have it fully contracted and so all I'm doing is monetizing cash flows, we can create just one one loan, and it's going to be all of the same guys sharing the same risk. If you can't do that, alright, I need a I need a $200 million loan at that level. And by the way, I know I have to put $100 million of equity, but I've only got $50 I need to find another $50 million bucks. So then what I'll do is I'll create two tiers. I'll have the $200 million, like a very low risk tranche. And then I'll create a second like a holding company loan. And that's going to have a different set of lenders because they're taking different level of risk

Bret Kugelmass
And at WestLB was that mostly lending money was that loans or was that also equity?

Ralph Cho
No these are all banks. So we basically all lend. Now, depending on which bank you're at some banks will do more aggressive lending and some banks will do more you know, lower lower risk lending, but we specialize in playing across the capital stack

Bret Kugelmass
And which comes first? Does the debt usually come first? Or does the equity usually come first in these projects?

Ralph Cho
Equity has to come first. Equity. It's like buying a house, dude. I mean, no bank is gonna tell you to go buy a house like you find the house, you come, you have to have the down payment, and then I'll fill out the rest of the money.

Bret Kugelmass
And that's the formal process is there an informal process as well, where an equity provider will want to know that it is debt financing to even get involved. So you got to do a little bit of a dance.

Ralph Cho
Of course, if you are, if you are about to go and buy an asset, and you don't have the full amount of money, let's say it's an M&A situation, right? You may talk to several banks and say, hey, what kind of loan can you give me? What's it going to cost me? Let's model it out. And you might solicit feedback from three, four or five banks, and you choose which one works for you.

Bret Kugelmass
And will those banks even talk to you before you have the equity component in place? Will will they talk to you under the assumption that, hey, we're not going to get serious until there's an equity plan involved, but we'll still lay out the basics of the deal for you.

Ralph Cho
Depends who you are, if you you know, I mean, if you're a super busy bank, and you are banking, all the big guys like the Carlisle's and the KKR's of the world maybe they might say, come back to me when you have equity. If you're more friendly, and I think of myself as one of the friendly side, I'll try to give advice to developers. I mean, we work with the big guys, just to give you some context for Investec. We work with the big guys, but we work with a lot of middle market players too, you know, and, you know, from my perspective, I want to do deals with people who I know are not just a one off, you know, I know I want to do repeat business with these customers. So if I think that this person is going to be someone that I can partner up with and do more deals down the road, I'll spend some time up front and just say, hey, maybe you think about this, maybe think about that. But there are certainly a lot of players out there, like advisors that are really we're willing to work with early stage sponsors, who might not know how much equity they have to raise, because they haven't raised the equity yet what the deal has to look like and, and these advisors will actually engage with these, with these sponsors really early. So there are different types of players out there. Now, obviously, these advisors don't have their own capital, but they get paid upon success.

Bret Kugelmass
And do you like to see a deal come in through an advisor? Or are you comfortable with it coming from the sponsor itself?

Ralph Cho
Most of our business comes from banking clients, to be honest with you. I mean, do we do we see some advisors? Sure, we do see, at least in the US markets, most of the business we bank directly from clients. Now different markets, different geographies have different models. You know, obviously, we in Europe, I also run co-head the European business as well, and, and there seems to be more advisor dominant. But the general business models you want to make clients.

Bret Kugelmass
Yep. And what, what do you need to see from a client to know that they are serious? I mean, I can imagine there's all sorts of little developers all over the place, trying to bring projects to fruition solar farm here, you know, wind project there, who knows? You, you so if you've got people constantly reaching out to you, how do you know, like, like, who you're going to spend your time with?

Ralph Cho
There's different types of business that you can do as a lender, right? Number one, the sponsor might already own the asset. They say, Hey, I already have an asset and I've got a loan, it's like you owning a house, and you have you want to refinance your mortgage, same thing, like, okay, let's see what your loan looks like. And can we do something better, your loan is maturing, and next year, or you're paying a super high interest rate, markets have moved, let's see if we could do something better. That's one idea. Another way is a sponsor says, Hey, I own the land, I've ordered equipment, I've put a lot of initial capital in, and now I need to build it. But I own everything, I got to build it. And so they have a budget of how much money they've got to spend. And we're going to help structure a loan to get their asset built. So these are two very real situations, right, because they've got the asset. The third bucket, I would say is if you are interested in buying something, and there's an auction actually going on now, you might not have one, right, because it's like bidding again, on a house, you don't know if you're the winner, but you have to present your bid. And you're trying to make your bid as firm as possible. So either a you're bidding with all cash, which is your equity. But if the assets too expensive, you're going to want a bank to underwrite the loan next to you. So when you present your bid to the seller, you can tell them, Hey, I'm good for my money, those situations, who knows if you win or not, but I mean, from from our bank's perspective, and I would say a lot of banks out there, they're willing to support sponsors, especially good sponsors that are willing to, you know, take a run at it and pay the bills because it's not cheap to get an underwriting right. You got to engage lawyers and consultants and experts and all sorts of stuff. But if they're willing to do the dance, there are definitely banks out there willing to give underwrite, there's just more uncertainty with that type of situation.

Bret Kugelmass
And then how about what about like greenfield projects? How did those look?

Ralph Cho
So that's basically a sponsor who has been developing an asset for the last, call it however many years they own the land or they have some option on the land, they've done all the preliminary research on, on what the solar statistics look like, or what the wind statistics look like or if they're building a gas fired power plant, they've got their permits in place. So they're getting all the pieces together to get to that point where all they have to do is hit go, and they can start construction. But to start construction, you need to start paying a lot of money. So that's the point of time where, right before that point time is where they're going to try to start lining up financing.

Bret Kugelmass
And how much would they have already spent? How much would a sponsor a project developer spend before they line up financing, just getting all those things in order?

Ralph Cho
Depends what stage of financing you're at. Right? If you just started in your early stages, you might not have spent that much money other than some preliminary legwork. You know, a lot of private equity companies might even just pay a developer off and just to take over what they the work that they've done. So it could be a little bit, it could be a lot.

Bret Kugelmass
I mean, you say a little bit a lot. Do you mean a little bit is a little bit $100,000? And a lot of it $5 million, or where?

Ralph Cho
You're trying to nail me down on a number? It really depends on the size of the project, if it's a 1000 megawatt power plant, I mean, their gonna spend a lot of money, right? It could be it could be millions and millions of dollars. If it's a small project, right? I mean, yeah. Imagine it could be like a million bucks. It really depends. There's a whole range, right? From our perspective, because we're a bank, I'm probably not going to be the best bank, if you're looking for like a $10 million loan, you know. So generally, the projects that come to us are going to be something where people need at least $50 million of loans. And so they've sent a couple several million dollars before, before they're coming to us.

Bret Kugelmass
Now, how did your career evolve from being at West to Investec? What was the change there? What happened?

Ralph Cho
WestLB it was a very large German bank. And I spent about nine years there, and it was a good run, ironically, my partner's from there too. But, you know, WestLB, and I probably would have just stayed there forever, I think because I was working with a good group of people. But the bank got in big trouble from the EU. I don't know how much you know about their story, but

Bret Kugelmass
Not much at all.

Ralph Cho
Yeah, they got in big trouble from the EU, not from our business because our business was power was relatively small, considering the whole bank, but they got in trouble from the EU for for a whole host of things. But ultimately, the EU Anti Competition Commission basically forced them to shut down without going into all the gory details. But well, once they got shut down, that bank went into unwind mode, and they became just a portfolio bank. And so at that point, anybody in the front office capital markets originations, you know, we were basically just given a package and Investec was, was one of the banks that I was actually selling paper to, and bringing into transactions and, and and a good competition started from there, because they had aspirations to also build out a power infrastructure financing platform in the North America region.

Bret Kugelmass
I see. So Investec actually was literally acquiring part of WestLB's business.

Ralph Cho
No, no, no, no, no. Investec with somebody I used to bring in on transaction.

Bret Kugelmass
I see okay, on previous transactions. Got it.

Ralph Cho
When WestLB was shutting down they were like, hey, come talk to us. Let's figure out how we can do something.

Bret Kugelmass
You just had a former relationship with them. You knew about them. So they had a good reputation said, Okay, this is somewhere where I could add value. And then so tell me about that. Had they done previous power projects before? Was this a new division for them?

Ralph Cho
They did. I mean, they're they're definitely, investing is an interesting animal, because they're definitely strong in South Africa, because they're a South African bank. And they're, and they're strong in Europe. And they're, that's where their two headquarters are. They didn't really have that much of a presence in North America. In fact, they had a small office in Toronto, in a really small office in New York and New York didn't even do project finance. So when, when we started conversations, I was like, Look, maybe this the opportunity looked interesting to me, because it was kind of like, Oh, we have a blank sheet of paper and an opportunity to create something. And that sounded a lot more interesting to me than to go and join another large bank. Yeah, you're a cog in a wheel.

Bret Kugelmass
Yeah, that's awesome. And so what were the first types of projects that you started looking for to build up the business there?

Ralph Cho
Well, we're always doing power and infrastructure finance. Every bank has a different risk tolerance. Every bank has a different cost of capital and Investec is no different. My partner I mentioned to you he came over with me he was WestLB. My partner focuses more on the origination side and I focus more on the capital market side. So the two of us kind of went hunting for deals right of what we thought could work for this bank. And I remember the first deal we did was we monetized lease payments against a portfolio of solar and wind projects. So that was an interesting one. Basically, they're all these projects have to pay rent, right rent or lease payment for the land that they sit on. So somebody owns that land. And so in this case, our borrower owned all this land, like whole portfolio of land with like hundreds of projects, and was just basically collecting payment rent payments. And so we monetize that. And I was an interesting deal because your security package isn't the wind farm is not like you can foreclose and take the wind farm because you don't own the wind farm, you only own the land, you know, and so there was some brain damage there. But we got our bank to do it. That was our very first transaction.

Bret Kugelmass
And how did you know to go after that one? I mean, I imagine like the world was your oyster, when you were first hunting for deals, there could have been so many different types of deals even within our sector.

Ralph Cho
Totally.

Bret Kugelmass
What do you do? Is it just you start calling up old contacts and saying, Hey, what's going on out there?

Ralph Cho
Yeah, look, I mean, by the time I came to invest, I remember I was at WestLB for nine years or something like that. So we had already a roster of relationships out there. Not many of our clients knew who Investec were, but they knew who me and my partner were. So really banking relationships at that point. And so yeah, of course, we're talking to everybody, I think, around that time was when the whole wave of quasi merchant gas, greenfield projects were being financed. So these are new combined cycle gas plants all being built with, you know, partial hedges, partial contracts. And, and I remember wanting to do that as our first deal but the bank was like, Whoa, let's not go too crazy. And let's do something a little bit more, more contracted in nature before we start jumping into merchant risks.

Bret Kugelmass
And so when you say you monetize a project like that, what does that mean? How do you monetize it? You? Would you buy a contract from somebody and package it up and sell it to somebody else? What do you do?

Ralph Cho
Now monetizing means, when a project enters into a contract, and says, oh, with another counterparty, and that counterparty says to you, Hey, I'm gonna pay, you call it $100,000, well, send me a million dollars a month, I'm gonna pay you for it and you're gonna sell me power. And by the way, I'm going to do that for you, for you for the next 10 years. So every month, I'm gonna pay you a million bucks. So the the guy who's entered into the power plant, he now knows he's getting 12 million a year for the next 10 years, because that's what the contract is. And so when I say monetize, what I mean is, is some lender will come and say, Oh, you've got a stream of cash flows. I'll give you cash today. And then we'll figure out how I'm going to get paid back by that contract. Yeah. And that way, the borrower doesn't have to wait for 10 years to get his money. He's monetizing it. Yep. And so the idea is the bank is more set up for those slow and steady returns. And then the person who sold it to you, they want the cash now, so they can get involved in another project and put it to work. And a whole bunch of reasons why they might do it, they might monetize it, because they need that cash to pay for the construction of the asset. Hmm, that's right. Because they, I mean, a power plant could cost a billion dollars to build, right? So how if they go and sell that power ahead of time, they've now created receivables, right, if it's an investment grade entity, now, if it's some unrated shady company, that's probably hard to monetize. I mean, you you wouldn't take a view on that. But if it's some like double A single A triple B type of company, some regulated utility, right, say, I'm gonna pay you I'm good for the money. And here's a contract, you got my word? Yeah, some, some bank will give financing against those stream of cash flows. And if it's somebody who's trying to build a power plant, he can use that cash to, to, to finish the construction, if he already owns the power plant, and he and this is a new contract that he just layered on and he wants to monetize that, that that could be like a dividend that he would pick up

Bret Kugelmass
And then how do you assess risk for something like that? How do you know that? There won't be some you know, issue either technical or legal or maybe the subsidy for the solar panels will change sometime in the next 10 years?

Ralph Cho
We analyze everything, you hit all of them, you analyze everything, right? Technology risk, is this it my contract is 30 years long. Will these, will this payment or a wind farm or a combustion engine, will it last 30 years? And you have to, you have to get comfortable with that. What are the warranties associated with it? Because if it breaks, who's gonna fix it? How much is it going to cost? You have engineers, so we hired technical engineers to go through and comb through the asset, go through the construction contract, or go through the specific piece of equipment and tell me like, Is it going to work? Is it going to do what they say it's going to do? You have market consultants that come and tell you, especially if you're going to sell on the spot market, your market consultant could tell you, oh, well, we think power prices are going to go this. And so you're going to be okay, worst case, power prices could go this way. And then you just model those numbers and say, all right, how much of a downturn can withstand? You have lawyers, I mean, trust me, lots of money gets spent to do deals, you have lawyers who comb through the contracts, especially if it's a if it's, someone's buying the power from you, and the lawyers are gonna tell you, okay, well, they can get out of the contract if X, Y and Z stuff happens. Are you comfortable with that? You know, and so you got to quickly take a view, like, Alright, what's unusual, what's typical, what's not typical? What am I willing to accept, what things need to be renegotiated? And, and you get to the point where, if you can get comfortable with only so much cash flow coming in, maybe you have to reduce your leverage, right? Because you do still take comfort that the owner has equity in the asset, right, I'm not lending 100%, because a billion bucks, let's say I learned 60%, that I know that the that the equity owner will care about the project very much because he's got 40% skin in the game.

Bret Kugelmass
And then the different types of risks that we mentioned, is it that, you know, some banks are more conservative overall than others? Or is it that some banks are more comfortable, different types of risks, some are more comfortable with regulatory risk are others more comfortable technology risk.

Ralph Cho
So this is where I specialize in because I'm a capital markets person. I talked to everybody. I talked to commercial banks, Asian banks, Chinese banks, I talked to I go to I go to South Korea, not North Korea, South Korea, to go talk to them and see if they're interested in our projects. I talk to credit funds, hedge funds, life insurance companies, etc. And so you kind of quickly get a view of who's willing to do what type of risk and what type of yields are they looking for, like, if I come talk to you, Bret, you might say, Ralph, I only want to do you know, investment grade rated debt, I don't want to do anything too crazy. Like, you know what, I'm willing to get paid really low interest to 3%. That's all. And then I talk to somebody else, and somebody else is gonna be like, dude, I want 7% interest. And I wanted to take all sorts of crazy risks. You know what I mean? If you quickly figure out based on what deal you're structuring and what the deal looks like, you can quickly figure out who I need to talk to. And so that burden is on you one of the lenders, as opposed to the sponsor themselves to figure out, you know, who all the other lenders and what their risk appetites are going to be? Well, the sponsor is hiring someone like us, okay, coming to an Investec or some other bank and saying, Hey, here's my project, tell me what you can do. And then so I'll say, all right, well, what's your goal is your goal to leverage it to the hilt. And notice, no dividends or sometimes these infrastructure funds really care about dividends, right to go back to their investors. So they might not go crazy on the leverage and might go lower on the leverage, but they want to make sure that there's a consistent stream of cash flows that are being distributed back to them. So it really depends on what you as a borrower are looking for. Because it's all tailored custom made for the for the borrower.

Bret Kugelmass
I see. So you at Investec play the role of advisor as well as lender?

Ralph Cho
Yeah, yeah, we call it structuring agent, structure, underwriter, arranger. So, so basically, when you'd come to me with the problem, I tried to give you a solution. And I say you have a financing solution, one, two, and three. And it has a different cost, the more leverage more interest rate, you're gonna pay lower leverage, lower interest, right? That makes sense. Yeah. And you choose which one you want or that you think makes sense for you.

Bret Kugelmass
And then what part of the deal do you guys typically come in? Do you then take 20% of that allocation or

Ralph Cho
We anchor it . Well, sometimes they need an underwriting because they're in a bid situation, or they need firm cash at certain time. or other times they say, we're not, we don't need that firmness. We just want you to arrange it and you'll you'll take a piece of it and hold it. Keep in mind underwriting is expensive. So there's all sorts of things if you want me to give you a blank cheque ready to go, it's gonna cost you money, versus you saying I just build me a book. So if it's like a two $300 million deal, I'd be like, okay, I'll give me $50-$75 million, and I'll go raise the rest of the money. I'm putting my money where my mouth is because you're not paying me anything, unless I close you a deal, huh? Got it. Now lawyers are different, lawyers are gonna get paid, no matter what's paid, everybody gets paid. But if the bank can't deliver for you, you're not paying the bank because there's no loan.

Bret Kugelmass
Yep. And so how have things evolved over these last eight years that you've been in Investec?

Ralph Cho
In terms of?

Bret Kugelmass
In terms of what your practice looks like, what types of deals that you guys focus on? And even maybe the market conditions?

Ralph Cho
Yeah, I mean, look, I'll go a little bit back, when I, when I first started in this in the energy side of this business, you know, I'll tell you a lot of the activity and flow was around conventional power. I've even done greenfield coal assets, give you an idea. And over time, you know, it's definitely moved away from coal, you know, gas is still very much in the mix, right? Especially big combined cycle plants, we've, we've done a lot of those over the last eight, nine years, greenfield ones in a lot of different regions. But also over the last eight, nine years, we've also seen more and more renewables come into play. And I think that's probably maybe where you're heading with this, we see more and more solar, more more wind, we've done utility scale, which is where they just pick one big site, and you build like a ton of wind and solar assets, selling power. I've also done more and more distributed generation over the last seven, eight years, too. And what I mean by distributed generation is is like, residential, solar, you know, where you have a portfolio of solar panels on people's homes, you're not going to finance one by itself, it's too small, but you can look at, like 10,000 20,000 30,000 pool of these. And we do it for some of the largest resume solar companies out there. Like, like Sunrun, for example. Right. And it's publicly traded. There also, I would say it's community solar assets, if you're familiar with that model, that we've just looked at doing as well. And now I think that my expectation is to see more like storage, or battery, different types of technology around battery fuel cell, I think hydrogen is there's a lot of talks around hydrogen being a potential being a potential way of doing things. So lots of changes. And that's I think one thing that makes this whole energy space be really, really interesting is between the technology and the regulatory framework and how the the winds are blowing, no pun intended. The market dynamics are always changing a little bit.

Bret Kugelmass
And then how do you think about the introduction of some of these newer technologies such as hydrogen, or maybe a new type of battery installation that hasn't been done before? Do you do? Did lenders feel comfortable underwriting a new type of project?

Ralph Cho
Yeah, so this is a it's a good question right? It's very good question. I would say if it's brand spanking new, from a company you've never heard of, probably difficult, that's to say, maybe venture capital money, or equity just has to go in on themselves. Lenders, basically want to know that if they lend to this project, it's gonna work. If it breaks, someone's gonna fix it. And they can get paid back the money that they lend, with a little bit of interest, so you won't get paid back the money that we bought, we lent out. And so if it's something brand new, I think it gets difficult and, and even when you hire an independent engineer, they'll probably tell you, oh, it's untested. They haven't had enough hours in commercial operations to have a view. So it gets difficult to sell that deal to our partner.

Bret Kugelmass
Is there? Is there a good milestone point where that changes, like after three months of operation or a year of operation or three years of operation? Does that calculus change?

Ralph Cho
I mean, I've never heard of a red line. But I mean, we generally look at it on our, you know, 100,000 hours of operations under us no issue something like I need a clean bill of health from some kind of engineer, some expert because maybe you or I are not the experts, but there are engineers out there that can tell you, oh, no problem. This is going to work, you know, or, or give me some big name or like Samsung. Samsung stands behind this battery. We made it if it breaks for the next 10 years, we come and fix it. No questions asked. Like that.

Bret Kugelmass
Yep. And, and how does this change with some of the green incentives that are apply or their government programs that are developed either through like, let's say, tax benefits or you know, government backing of loans To come in to help encourage some of these newer technologies and to get some of the private capital involved.

Ralph Cho
I mean, I haven't heard any benefits specifically by these by, by a specific technology. I mean, just in general, just to set back the renewable space, like whether you're building solar wind, that it's expensive, as I'm sure you know, it's it's more if you are sitting here with just with your own money to invest, and you're like, should I build a gas plant, which is going to make 100 megawatts of energy that I can sell? Or should I build a solar farm to make 100 megawatts of energy? I mean, energy is energy, right? You're not going to know whether it's sold, it's going to cost you more money. I want to say order magnitude, like three or four times more money than to build a gas plant. Right? You're thinking more money to make the same unit of power? Yeah, doesn't work. So what we do here in the US is, the government helps subsidize these by giving renewable projects, certain tax benefits, if you're familiar with this, right, so they get tax benefits in the form of either tax credits, or accelerated depreciation, so that somebody can take advantage of these now. It's, this is now the topic of tax equity, which everybody loves. It's overly unnecessarily complicated, but but basically, a developer who's making projects, hard for them to take advantage of these benefits, tax benefits, because you have to be somebody who makes money, you have to be profits. And so what they end up doing is they end up selling those tax benefits to someone. Okay. Generally, these counterparties tend to be financial in nature, if somebody's making profits, because that's who's going to best utilize these tax credits or tax benefits.

Bret Kugelmass
How does that get packaged up and sold? Is that through another type of bank is that through you guys? Who does that packaging?

Ralph Cho
There's advisors out there, or they'll kind of deal directly with some tax equity player guy, like, they could go to JP Morgan, and just say, Hey, you know, I have this project, this is what its gonna look like, and this is what the tax benefits are going to be, would you be interested in buying them and so I'm really simplifying this, okay. So all the lawyers listening on the phone are gonna, you know, say, Oh, I'm missing those. But in general the counterparty like a JP Morgan is going to buy those tax benefits. And that gives the developer more cash that they can use to build the asset, it helps subsidize their asset. Now, the tax equity player generally doesn't. My opinion doesn't care about the asset, they're in it for the tax benefits. But the US government does things to make them care. They make them say, Oh, you can't just buy tax benefits, you got to buy cash flows to get just go and invest for tax equity purposes, in assets that don't work, they have to work because your your incentive to care because you're getting cash flows out of it. And so this is where it starts to get complicated for lenders, because if the tax equity guys taking some of the cash, that's less cash that goes to a lender, because remember, the lender is there specifically to get repaid. And so that's where the a lot of the structuring and modeling take place. But that, in general, is how these renewable projects are subsidized.

Bret Kugelmass
Now, you mentioned earlier, hey, renewables, you know, three to four times more expensive for the same power output. I know that and everyone I talked to in your industry tells me that how come in the media then I always see solar is so cheap wind is so cheap, the PPAs are the lowest that have ever been seen. It's it's crazy that we don't just only build solar, when it's obviously cheaper than fossil fuels. Why is that this disconnect?

Ralph Cho
Well, I mean, look, maybe the media, they just they're sensationalizing it. But it's cheaper, because it's free, no variable cost. Once you have a solar asset up and running, you just sit there. And when it's sun shines, you're making power. And when it's not shining, you don't make power. Same thing with wind, where it's in a gas plant. I mean, think about it. I mean, you've got to burn gas and gas prices go up or down. And so if you can't access gas, you can't make power. So you're buying power. There. There is a cost. There's a variable cost to running. And so so the statements they're saying is accurate, that it is cheap to make power, because it's free. Only issue is to get the machine built is expensive.

Bret Kugelmass
Yeah, yeah, that makes more sense. And then juicy things you're changing as storage comes into play does does this does this change the calculus at all? Or is this just yet another thing that's expensive that has to be built?

Ralph Cho
It's interesting on on storage and look on learning to write on how this is going to go and find a crystal ball what the future looks like, dude, I would I would not be here right now. I think when I look at how storage can play if you think about added storage charges when you want to charge storage when it's cheap when power is cheap, generally, maybe at nighttime, right? And you want to put the power out when power is expensive. So you're creating a little, right you buy power, when is cheap storage. And then when power is most expensive, you let it out. If you think about how a peaker, a gas peaker works, they're very cheap to build. But it's expensive to operate, because you have to burn a lot of gas to make power. But, but what what people love about peakers, or why they're critical to the grid is because, you know, sometimes you need extra power out there, like, you know, you can't control on a super hot day. And everybody decides they want to turn on the air conditioner, you've got to generate power if the demand is there, and nobody wants to be short on power. And so they turn on peakers storage is going to be a great solution for that too, right, you can just store up all these batteries, and just hang out until the moment some demand spikes, and then boom, you can unleash power just to kind of fill those gaps. So some people say that, you know, storage, if you start building it on mass, it's going to potentially it could potentially change the business model of peaking of gas peakers.

Bret Kugelmass
Yeah, for the peaking, that makes sense a lot to me, because of the like the arbitrage opportunity. But you know, when I look at the this part of what my organization does, you know, we look at like the big picture, 10, 20 years out, you know, just count up all the raw materials that would be needed to deliver all the energy that we need. The numbers are just astronomical. I mean, it almost doesn't even make sense to as an investor, how do you guys think you're looking forward into the future? Are you running your own analysis of, you know, does this storage thing really have an opportunity to play or is just look at the deals as they come? If it could be a peaker arbitrage in a good section? That's good. If not, it's not.

Ralph Cho
I mean, keep in mind, I'm not equity. Right? Of course, we're not blind, we want to support deals and projects that have positive momentum going forward. I don't want to have headwinds against me. But if you think about what my timeline and horizon looks like, versus an equity sponsor is different. Yeah. I just want to get paid my money back. And I want some interest in generally, our tenor of our loans go five, seven years. So I'm going to have some visibility over the next five, seven years. Is the world going to change in the next five, seven years? Probably, I mean, I think you could probably see what's going to happen over the next five, seven years, like changing everything to battery is going to take a super long time. Yeah, right. expensive. So that's not going to happen overnight. So in the meantime, I'm happy to finance peakers on with some like visibility upfront, but I will tell you, am I going to give them a 30 year loan? Probably not. That's unlikely, you know. But that's, that's what we need to see from from a lending position. If your equity your your calculus is going to be different, right, you're going to have to have some view of what the intrinsic long term value of these things are, or how you plan to get your your equity back, plus a return whether you want to sell it, or you're going to sit there and owned and operated for a long time.

Bret Kugelmass
So you're the co-head of the power and infrastructure group. Tell me about your team. What is your old team look like? What do you have about 20 people or so doing various types of analysis research? What is what's the organization look like?

Ralph Cho
In the US, we have about 15, 16 bankers, roughly. And in Europe, probably about the same 15, 16 bankers. We have, it's structured like any other team, right, you have a handful of senior bankers that are covering clients originators. And then the rest of the team supports that whether you have through mid level or junior level banking support, and we're analyzing deals. I mean, I think just in North America alone, last year, we must have looked at over 140, 130 transactions. It's a it's a funnel, right to filter, you might look at 140 but you know, what actually closes is probably about 15 deals 12 to 15 deals is what you actually

Bret Kugelmass
Closes with your bank or what actually closes like generally?

Ralph Cho
No, with our yeah, we call it we have a 10%, 10% hit ratio and end deals die for many reasons. I mean, either a the deal could have just died on its own because it didn't happen or be the sponsor decides to go with somebody else, you know, or, or yeah, for me generally, yeah, they could die for a number of reasons.

Bret Kugelmass
And on your origination side, what are you looking for today? You know, what's your strategy now as opposed to what it was previously? Are there certain types of power sources you'd like to get involved in? What is your origination process?

Ralph Cho
I can't say it's changed much. I mean, it's just we've just become more busier and bigger over the last eight years to when we started, it was just me and my partner doing deals together. But our strategy is, first of all, when it comes to technology, I gotta tell you, we're pretty agnostic. We want, we go with the momentum of the market. So for example, like I said, no more coal, that's not going to happen. There's no market for that. But if someone wants to bring us gas, like a combined cycle plant or some kind of peaker plant, we have no problems doing that. We're also looking at renewables deals, whether it's wind, solar, merchant renewables, construction, I mean, we'll look at all of that stuff. These days, people have been looking for incremental leverage. So we might give some kind of holding company loan, remember, I was telling you about, there's the there's a loan that you can give secured by the asset. And you can give a loan that's a little bit higher up on the structure. So we've been focusing on stuff like that. But when it comes to technology, as long as it works, we're happy to support them. Our thing, our client, our strategy, in general, is to focus on the clients that we know, right? I mean, you kind of start building relationships. And you do you want to do repeat business with a lot of the sponsors that are very active in the space, and these guys are the are busy anyway, right? They're always buying something, building something, or they're like trying to recalibrate something based on the market. So we tend to be busy enough just with them. But no, look, our team has grown to the point where we're also have time to work with a lot of middle market borrowers as well. So we're always adding to our roster of clients. But since you asked our strategy, it's definitely to try and arrange and support our clients

Bret Kugelmass
10 years out from now, you know, as we wrap up here, if you could, you know, put on your your magic cap, you know, look forward into the future. What do you think the market looks like?

Ralph Cho
That's interesting. Um, look, if I had to, if I had to take a view, just based on what I'm seeing today, there's definitely clearly movement away from fossil fuels, something that's undoubtedly like already, we used to be doing a lot of greenfield gas fields, and not so much these days. It's all it

Bret Kugelmass
Is that just North America or worldwide?

Ralph Cho
I'm talking about North America. Yeah. Okay, worldwide, Europe has a whole different set of dynamics. If you want to talk, we could do that, too. But the deals, at least in the US, we've been focusing, like I said, we're open, but we're seeing more and more renewables come through more different creative structures. For us, at least, we're open to financing more emergency. If I look down the road, 10 years from now, I mean, I think I miss dissipating that we'll do more and more storage. Maybe fuel cell could be something interesting. I think. I think EV infrastructure is something we haven't seen a lot of. But as an electric car owner, I would love to see more EV stations out there. But I think I think that's generally what it feels like that where the world is heading towards. Awesome.

Bret Kugelmass
Any last words for the audience?

Ralph Cho
No, I hope this was very interesting and helpful, you know, obviously, my background for on the financing side. So I think these developers and stuff that you have on the on the podcast are going to have much more insight into where the world is going. I just react to what people are throwing at us. And I have to tell you, it's super interesting to see how the dynamics have changed so much over the last, you know, 15-20 years, just by in the space. And one thing we didn't talk about is even how the where the liquidity sources have changed as well, because it used to just be all commercial banks doing this. And now, you have so much capital coming in from all sorts of places, like I mentioned to like, I'm going to South Korea, who doesn't even have a physical presence here in the US, and they're shipping, you know, billions of dollars of capital overseas just to be in part of these transactions. I mean, it's

Bret Kugelmass
Why is that why is the world so flush with cash, especially given what we just went through with COVID and everything?

Ralph Cho
Well, look, we definitely when COVID hit, I mean, markets took a hit, right? I mean, liquidity became choppy, and it's still choppy, but there's there's a lot of capital out there hunting for deals. And that's that's been a constant theme for the last two, three years. And it's not just because of COVID are looking to looking for opportunities on where they can make good returns. And specifically, why is Asian capital coming over? I think they're running out of opportunities to put the capital to work over there. And so they pick countries like the US that they perceive to be very stable, and they're realizing like these power and infrastructure asset class has good returns, you know, and are genuine relatively safe because it's a hard asset, you're lending against something physical. And, and they like the way that these deals are structured, they just need to make sure that they're making enough return because for them, the bars a little bit hard higher, because they have to convert their foreign currency to US currency swap them and bring them in over here. But we're also seeing a lot of institutional capital come in, like credit funds. You know, people are raising capital from different countries, whether it's Asia or Israel or or wherever. And in starting these funds, where they're willing to take a little bit more risk than a commercial bank, but they want a little bit more return, not a lot more risk, but a little bit more risk. And that's how they differentiate themselves. And so as a borrower today, you have a whole spectrum of options, like you can price in every type of risk and find someone willing to take risk is not like shut off to you. It's not like oh, commercial bank, or equity. There's a whole bunch of gray area in between, which I call like, the gray market. And that's all made up of guys like, like, you know, that are either very aggressive commercial banks, or this institutional capital that are willing to do deals without a formal credit rating from Moody's or S&P. And we've had a lot of success in working with those guys in providing incremental leverage, because a lot of our borrowers are looking for creative solutions. And that's, that's the value that we try to find for them.

Bret Kugelmass
Ralph Cho, thank you so much for your time. This has been awesome and really appreciate it.

Ralph Cho
No, thank you. Thank you very much.