Anyone who's ever been involved in securing equity investment, project finance debt, offtakers or finding buyers for their assets knows it's a long and arduous process. These transactions typically drag on for 6 to 12 months, leaving all parties exposed to the unpredictable whims of market volatility.

The Volatility Vortex

Market assumptions, rate assumptions, political risk, legislative changes, commodity risk – these are just a few of the factors that can change dramatically during a lengthy transaction. 

Over the past year alone, the US 10-year yield, an often used benchmark for the risk-free rate of return, has seen yield high points that were ~30% greater than its yield low points.

That’s sizable volatility but pales in comparison to 5 year levels where the yield high point was over 9x greater than the yield low point:

There are plenty of very common areas that demonstrate why this market exposure is a big issue for real asset projects. For example, consider the timing mismatch and potential implications of volatility of the following:

• Locking in a PPA price before securing your financing costs (the single largest expense for a renewable energy project)

• Gaining investment committee support assuming a cost of capital based on 10-year treasuries plus a spread (see volatility above)

• Launching a sale process in a favorable market tone and taking 6+ months to reach its conclusion

Transaction Implications

This volatility can result in deals falling apart or stalling indefinitely. It also frequently leads to a significant gap between what sellers are asking for and what buyers are willing to offer. The result? Either a stalemate or a negotiation with a counterparty who may no longer be the most attractive option but is the most advanced on due diligence.

S&P Global publishes stats on terminated M&A deals which, in part, can often be attributed to this market volatility exposure.

Why So Slow?

So, what's the cause of these drawn-out process timelines? The answer lies in a half-dozen key areas: 

1. the sheer volume of data room documents to be reviewed, 

2. the significant and manual Q&A back-and-forth between parties, 

3. the need to constantly adjust proposals based on due diligence findings and shifting assumptions, 

4. the lengthy transaction documents to be negotiated, 

5. the comprehensive internal reviews and approvals, and

6. drawn out post-announcement approval timeframes.

AI: The Transaction Timeline Terminator

But there's hope with purpose-built artificial intelligence solutions. As AI gets more broadly adopted in processes, it has the potential to cut transaction timelines in half. In future posts, we'll delve into how transaction-specific AI tools can tackle many of the most time-consuming aspects of transactions.  

The result of AI-supported transactions: 

• smaller volatility window, 

• fewer stalled deals, and

• more value-creating transactions completed.

If we can reduce transaction timelines and we can reduce the number of announcements like this one…