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Hannon Armstrong (NYSE: HASI) focuses on solutions that reduce carbon emissions and increase resilience to climate change by providing capital to the leading companies in the energy efficiency, renewable energy, and other sustainable infrastructure markets. Their goal is to generate attractive returns for shareholders by owning a diversified portfolio of investments that generate long-term, recurring and predictable cash flows from proven commercial technologies. Based in Annapolis, Maryland, Hannon Armstrong has been publicly traded on the New York Stock Exchange since 2013. As of December 31, 2018, they have $5.3 billion in managed assets.
“The number one challenge is our ability to accurately identify investment opportunities that have a good riskadjusted return,” says Dan McMahon, when asked about top hurdles to the future of renewable energy.
As head of Portfolio Management at Hannon Armstrong, a capital and services provider focused on sustainable infrastructure markets, Dan sits on the investment committee and has played a role in analyzing, negotiating, and structuring several billion dollars of transactions over the past eighteen years. The company manages a few major asset classes like wind and solar, as well as a portfolio of land underneath utilityscale solar and wind projects. The team also manages a significant energy efficiency portfolio on large commercial and government buildings. Currently, Dan is accomplishing all of this with a team of just twelve, including himself, four portfolio managers, six analysts, and one engineer.
“Sometimes I describe myself as a firefighter,” he jokes.
Dan, like many in the industry, worked his way up the ladder. In 1997, he left his job as a bartender in the Caribbean and moved to Baltimore to join T. Rowe Price, a mutual fund company. After three years, he was offered a position as Hannon Armstrong’s first asset manager.
“One of the best things I’ve done in my career is to move from a big firm to a small firm,” Dan says. “When I started at Hannon Armstrong in 2000, there were only six of us. I went from being a cog in the machine to sitting next to the CEO. With an organization that small, your individual contribution is very clear—I love having that visibility and impact,” he adds.
Over the next eighteen years, the team at Hannon Armstrong built out systems and grew as a company. After the first few years, Dan switched over to the investment team in an analyst role, and eventually became co-head of the investment team. The Hannon Armstrong team differentiated their firm by remaining profitable through the Global Financial Crisis. “Some of the best years we had were in 2008 and 2009 when the financial market was in turmoil. We had money when no one else did and were able to achieve profitability while others failed,” says Dan.
Fast-forward to 2017, and this is no longer the state of the market. “Now, everybody has money, which is another challenge entirely,” he says.
By 2017, the Hannon Armstrong portfolio had become large enough that it required executive oversight and Dan was tasked with tackling this initiative. When he assumed the helm as head of Portfolio Management, he and his team were facing challenges that hadn’t existed ten years previously.
“Finding and vetting new investments was becoming a long, overwhelming process,” says Dan. His small team was inundated with the sheer volume of data, transactions, and projects. Most of their time was spent on their solar and wind portfolios, creating monthly, quarterly, and annual operating reports, and adjusting these reports as line items like power prices and operating costs fluctuated.
“We had no usable database of information that would allow the team to quickly access and analyze portfolio information, and adjust the models as new issues surfaced,” Dan says. “Excel is a powerful tool, but by itself, it’s not an efficient way to access and manipulate the data points we need,” he adds. At the time, he knew the portfolio management team needed a way to create a digital database of asset data, preferably one tailored to the unique requirements of managing renewable energy assets like wind and solar.
Surprisingly, it became a challenge to find a solution that supported the unique needs of managing a renewable energy-focused investment portfolio. “Many of these providers were geared toward the operational aspects of asset management – the needs of our sponsors, the major utilities, and energy companies. We’re purely interested in managing investments, not doing purchase orders or tracking invoices,” says Dan.
Fortunately, through other colleagues in the energy investment world, Dan heard about an origination platform for developers called Mercatus that had recently launched an Asset Management solution, built specifically for investors in renewable energy technologies. “Since the Mercatus origination software was proven and well vouched for, we were willing to take a chance on something new and different for asset management,” says Dan.
The risk paid off. “The decision to digitalize our data and analytical processes has transformed our team from a reactive to a proactive organization,” says Dan. Recently, he asked one of his investment analysts to show him merchant pricing assumptions for a potential investment opportunity. She was able to surface up-to-date power prices and verify those with Hannon Armstrong’s financial models in the Mercatus Asset Management solution in about 15 seconds. They then very quickly modeled a few new investment assumptions.
“Normally this kind of modeling would take a few days, so the fact that it now only takes a few minutes is a complete game changer for our company,” says Dan.
The Portfolio Management team isn’t just saving a huge amount of time on modeling and reporting, Dan says. Digitalization has given the team better insight into operational performance. “We can compare our models to investment performance and see consistent patterns where actuals are outperforming or falling short of forecasts. This has become incredibly valuable to us – we’ve gotten much better at checking for those patterns on future investments. We can fully diligence to mitigate risk in a way we never could before,” he adds.
As a forerunner in the digital revolution for investment in renewables, Dan has three pieces of advice for those seeking success in this market.