RealPort: The partial exit proposition

Selling today means giving up the potential for future income and value growth. But a partial divestment offers access to liquidity and the ability to demonstrate value creation, without the pitfalls of a full exit or raising debt, says RealPort CIO Jon Boles

This article is sponsored by RealPort

What is RealPort and how has it come about?

Jon Boles
Jon Boles

RealPort was created to address the problems of access, transparency and tradability in alternative assets for small and semi-institutional investors. Our founder, Ekow Yankah, who holds over two decades of experience in tech entrepreneurship, brought together a group of real asset, finance, regulatory and digital technology experts and investors with the single aim of making alternative assets globally tradable. Through our digital brokerage platform for single assets, renewable asset holders have the opportunity to unlock value through partial divestments – without losing control of the underlying assets – while enabling investors to build and divest bite-sized positions in single real assets for portfolio optimisation.

Why focus on renewables?

From a structural and technical standpoint, the platform can be applied to any investment with reasonably predictable cashflows – other real assets, such as real estate or infrastructure, as well as other parts of the capital stack, such as senior debt. Undoubtedly, investments in renewables are increasingly popular, and with good reason – they are one of the few ways in which investors can link impact directly to income. Creating affordable access for semi-institutional investors can help close the financing gap to meet the ambitious climate change targets set out by governments and industry. Renewables were a natural choice.

What types of renewables assets, and in what geographies, will you initially be targeting?

We are focusing on European wind and solar assets with a minimum of 18 to 24 months of operations. The rationale is simple: we want to avoid political risks as well as development and start-up risks, thus bypassing any debate about performance. Transparency means demonstrability of outcomes, particularly building on a technical and economic track record.

How does the platform actually work? Where in the capital structure will you sit and what rights will you hold?

We provide a partial exit to the asset holder by signing profit participation notes, which are a form of mezzanine capital or preferred equity linked to the economic outcomes of the assets. We work with the asset holder to adapt to the existing ownership structure of the asset, so our investors sit behind senior debt and pari passu alongside other investors in the capital structure. From a tax and accounting perspective, the notes can be structured as equity, but without voting rights, or as debt, but with a variable payment tied directly to the performance of the asset instead of fixed interest payments. Additionally, there are no covenants or restrictions except drag-along rights in case of an exit scenario.

What benefits does this solution offer to institutional investors and what kinds of investors are being targeted?

The targets are small and semi-institutional investors that have problems accessing sustainable, individual, operating real assets. I’m talking about single- and multi-family offices, for example, which have the scale to benefit from including renewables – or real assets in general – in their portfolio allocation, but are too small to gain effective access to the asset class. Successful investment in real assets usually means one of two things – either committing to building a particular skill set or writing a cheque to a blind pool. We are offering an alternative to both.

After all, there are very few opportunities to invest in attractive, de-risked single assets with smaller tickets. In addition, high transaction costs are a barrier to onboarding these types of investor. Our digital securitisation technology enables small institutional investors to take bite-sized positions in sizeable assets with low transaction costs. Furthermore, we enable small investors to allocate alongside experienced asset managers, where they can count on an alignment of interest and leverage know-how to deliver returns. Our secondary marketplace allows investors to exit their positions prior to maturity. Lastly, RealPort makes an independent assessment of every asset prepared by Scope Analysis, our independent analytical partner, available to investors, with regular updates. This makes up for smaller investors’ lack of analytical capabilities in the space.

Even with the involvement of an independent partner providing analytical expertise, how can investors with limited resources get comfortable with the level of risk they are taking?

In addition to the assessments produced by Scope, these investors are coming in alongside experienced asset managers, on the same terms – except for voting rights – and have the ability to trade in and out of positions as risk perceptions and portfolio requirements shift.

What form does the due diligence take?

Due diligence begins with an asset manager assessment, conducted by Scope. This provides the chance to understand the manager’s operating track record and their approach to risk, compliance and governance. Due diligence on the asset is then performed, including reviewing financial, technical and risk reports, while doing our own modelling. This enables us to take a view on whether the asset has the right quality and characteristics for our investors.

Once we are satisfied and our asset selection committee has given its approval, we mandate Scope to undertake an asset-level analysis and produce a financial model and SWOT analysis on the potential investment, which is available to interested investors for review. Further, we aid the investor in performing their own analysis. The ultimate objective is to create transparency by evaluating the assets in terms of their economic outcomes – in basic terms, their cashflows.

How do you deal with the complexities of that compliance as a digital platform?

Compliance checks, whether KYC, AML, UBO or investor qualification, are among the biggest headaches for asset managers looking to access new capital. We act as tied-agent of a Bafin-regulated investment broker and work with a number of financial institutions acting as depository agent, custodian and paying agent. Each counterparty we transact with has to go through a very rigorous compliance clearance process, and that’s where the technology comes in. We are able to streamline the process, save time and effort, and drive down costs for all parties. The asset manager only has to deal with one counterparty – RealPort – and is able to rely on our vetting process for investors. Of course, we put the asset manager through the same checks as well and perform confirmatory updates on a regular basis.

What are the immediate plans for the platform, in terms of launch?

We are in the process of conducting our maiden transaction on the platform as we speak and are opening it to a select group of asset holders and investors to ensure we deliver on quality, efficiency and a frictionless experience for both buyer and seller. We’ll selectively open the platform to more investors in the latter half of the year as we get ready to launch our secondary market platform.

There have been multiple attempts to introduce tradability to private markets over the years, but none have really taken off. The conclusion has typically been that these are fundamentally untradeable asset classes. Is that a concern?

The key challenge to creating tradability is comparability. We deliver transparency for each asset by analysing its operating track record and forecasting its future cashflows by an independent third-party rating group. The platform then issues digital securities, creating fungibility for those particular cashflows. The efficiencies of the service enable semi-institutionals, which don’t necessarily buy to hold, to access these cashflows with divestment options. The combination of comparability, transparency and growing investor demand for fungibility will deliver tradability which looks more like efficient reallocation of positions between market participants, rather than high-frequency trading.

Do you expect to expand into other sectors, geographies and asset classes over the longer term?

The exciting thing about this solution is that it will work across other verticals including private debt and venture capital, as well as other horizontals and geographies. Indeed, I’m particularly excited about opportunities in Asia. We are fortunate enough to have a strong core of experienced investors that are committed to a long-term growth plan, and that will enable us to move into new markets once we’ve established a solid base in this one.

Why does a partial exit make sense for owners of renewable assets in today’s market?

For the holders of renewable energy assets – asset managers, YieldCos, strategic investors and developers – we are offering a new solution to the problem of unrealised value in their portfolios. If they want to take advantage of yield compression or demonstrate the value they’ve created by de-risking assets through effective operational management, they are facing pressure from investors to realise profits like many managers, or just want access to early liquidity for distributions, they typically face a dilemma. Selling today means giving up the potential for future income and value growth. The usual alternative – borrowing against the asset – means fixed debt payments, and often covenants and restrictions as well. With our approach to partial divestment through profit participation, however, the asset holder can demonstrate the value they have created with ‘live’ market pricing, access some liquidity and avoid the pitfalls of a full exit or debt.