How Much Equity is Enough in Project Financing?
Success in the competitive marketplace depends not only on building a better mousetrap, but also on getting the financing right. A firm financing a new business venture must seek a competitive mix of debt and equity based on the pricing of these funds in the capital market and the appetite for risk among the investors who provide them. The chief financial officers of major firms are preoccupied with balancing debt and equity in the corporate balance sheet. In the world of project finance, this balancing act is even more difficult owing to the structure of project financing deals, their greater risks, and the incentives that guide their sponsors. These factors weigh heavily in deciding if there is enough equity in a project finance deal. Limited Recourse versus Full Recourse Financing In traditional corporate finance, a company will keep a project on its balance sheet or fund it through a new company with the backing of the parent firm. The added comfort of having full recourse to the p
