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Minimizing Risk and Maximizing Return: A “Crystal Ball” Approach to Portfolio Asset Management

May 7, 2018 3 MIN. READ
What happens when asset managers anticipate and resolve risks early and quickly? Financial and technical success.

The primary objective for portfolio and asset management for power and infrastructure assets is to monitor investments and not only maintain, but maximize, the financial and technical performance of a project. Additionally, asset managers need to:

  • Manage contract administration, which includes compliance with project and financing documents, vendor management, stakeholder reporting, invoicing, and amendments, consents and waivers;
  • Provide a technical and financial performance analysis;
  • Maintain positive relationships with project participants; and
  • Navigate issue and conflict resolution, including offering a feedback loop to the originating deal team.

All of these critical responsibilities surrounding asset management underline the need to take a very deliberate and calculated approach that minimizes outages and facilitates decision-making.

There are various schools of thought on how this is best achieved, but the proactive identification of risks at the onset of any project and focusing subsequent activities around the mitigation of those risks will create maximum return to owners and investors, and debt repayment capacity for lenders.

One could even argue that this type of approach is required in order to reduce underperformance of projects and maximize cash flow. Asset management services intimately tied to the technical and market advisory consulting services optimizes asset owners’ strategy and cash flow for the life cycle of the asset.

Incorporating asset management that is focused on portfolio optimization provides for more comprehensive, tailored support for the asset owner, investor and developer throughout the lifecycle of the investment(s). While technical, market, and interconnection due diligence each provide important insight for the purposes of investment, portfolio and asset management focuses on ensuring a proactive approach to monitoring projects from a commercial and financial perspective such that stated goals for financial performance are more likely to be achieved.

In order to truly emphasize the importance of a risk mitigation approach to portfolio and asset management, it is helpful to outline the risks of ineffective portfolio and asset management that does not focus on risks. When it is not working well, various risks surface for the project and owners, including default, operational, financial and data integrity risks. In an ineffective portfolio and asset management framework, the following typically occurs:

  • Compliance deliverables are missed which could result in a default under the documents;
  • Inadequate reporting results in lack of information and lengthy or difficult decision-making;
  • Inadequate monitoring of financial and technical data could lead to underperformance of a project lasting longer than necessary. This could lead to production and cash flows falling below forecasted amounts, delayed cash flow distributions, or delayed yield-based flip dates for tax equity transactions;
  • Delayed or missed invoices and billing;
  • Inability to find documents or information in a timely manner or the need to re-create deal history.

Minimizing these risks and maximizing investor returns and debt repayment capacity are achieved by focusing on efficient monitoring processes and practices as well as analyzing and mitigating financial metrics and related risk. Without diligent portfolio and asset management, assets and overall investments may not be realizing their full potential, or even worse, may be at risk.

By Katie Janik
Viborg thermal power station in Denmark
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