Project finance debt providers will seldom allow the project to be funded by debt. Consequently the project will almost always require at least some equity investment. Equity investors can be categorised into strategic or financial investors. Strategic investors include the project developer, construction counterparty, operator or supplier.
Financial investors will have no interest in the project other than their investment. Private equity infrastructure funds invest in industries such as electricity, gas, water, telecoms, roads and airports, to acquire a steady return over a long period of time. Infrastructure funds aim to maximise gearing to increase equity returns, possible because of the typically stable cash flows on infrastructure transactions.
The private equity sector is dominated by a number of large firms, mainly based in the USA, but operating internationally. Compared with top US buyout groups, European private equity firms tend to be small and confined to national markets.
The expected returns required for investment at each stage of the project lifecycle vary, as does the risk of such investment. The cost of investment is typically measured on a discounted cash flow basis, possibly with probability-weighted elements or simple scenarios. (Anecdotally, I have heard of stochastic project models, but never seen one, and am a little dubious as to the additional value that they might add to an investment decision.) The price of equity is then typically determined by back-solving for a required return (which will be, mathematically, the risk discount rate).
Generalising grossly, equity returns might look something like the following:
| Lifecycle stage | Return |
| Development | Very high. Returns for developers may be extremely high because the development fee is often used as a free carry in the project. Relatively little cost compared to the capex is expended in the development stage, but can all be lost if the project does not go ahead. |
| Pre construction | Medium-high |
| Post construction / operating phase | Low-medium |