The IRR Illusion: Why “Strong Returns” Don’t Move Capital
Too many clean energy founders and developers believe a high internal rate of return (IRR) is enough to unlock institutional investment.
It is not.
Many first-of-a-kind (FOAK) projects in the United States include long-duration storage, hydrogen, thermal networks, and carbon capture. These projects often show incredible internal rates of return (IRRs), but still fail to attract capital from pension funds, insurers, and infrastructure lenders.
Why? Because IRR doesn’t equal investability.
Institutional capital is not chasing top-quartile returns. It is chasing predictable, risk-adjusted outcomes that fit within strict mandates. If a project’s risks can’t be clearly underwritten, modeled, and managed, the return doesn’t matter.
What Institutional Capital Actually Screens For
Here’s what institutional investors look for in early diligence:
- Revenue certainty: Are there long-term offtake agreements? Is the buyer investment grade?
- Risk allocation: Who absorbs technology, construction, and feedstock risk? Can it be shifted to credible third parties?
- Capital stack logic: Are equity, debt, and concessional tranches structured to reflect real project risk?
- Exit visibility: Can this asset be refinanced or sold before fund maturity?
- Credibility of delivery: Who is developing the project? Who is advising?
None of that shows up in a simple IRR line.
The Real Problem: Invisible and Unstructured Risk
Founders often flag risks in their pitch decks. But identifying risk is not the same as designing around it.
What institutional investors need to see is:
- Performance guarantees from contractors or OEMs
- Revenue floors or hedges to protect against price volatility
- Concessional capital to absorb early losses
- Robust financial models that account for construction delays, ramp-up time, and operational uncertainty
- Clearly defined downside scenarios and how each stakeholder is protected
If a project hasn’t done the work to allocate risk thoughtfully, no IRR will get past an investment committee.
The Liquidity Mismatch: Why Time Horizon Kills Deals
Another barrier is exit uncertainty.
Many advanced energy projects in the United States are designed for 20–30 year operational lives. But the funds considering these projects often have 8–10 year durations or even less, with pressure to recycle capital and show interim liquidity.
Common red flags include:
- Long development lead times with no interim returns
- Delayed revenue visibility
- No clear refinancing strategy
- Lack of rated entities to anchor future takeout
Without a roadmap to liquidity, via refinancing, acquisition, or a yield vehicle, even the most promising project won’t make it through diligence.
What Actually Makes a Project Investable
If institutional capital is not showing up, the problem is structure, not story.
Here’s what we see working in real mandates:
- Thoughtful capital stack design: Grants and early equity used to de-risk before layering in senior or mezzanine debt
- Real offtake traction: Signed contracts or LOIs with buyers that meet credit thresholds
- Pre-structured takeout pathways: Whether through utilities, strategic partners, or private yieldcos
- Advisory credibility: Independent capital advisors involved early to validate structure, not just facilitate introductions
A high internal rate of return (IRR) is a starting point. But institutional investors fund what they can model, exit, and own, not just what looks good on paper.
Final Word: Structure First, Returns Second
If your project has a compelling technical vision and a double-digit internal rate of return (IRR), you’re halfway there.
But if you haven’t built in:
- Risk transparency,
- Exit logic, and
- Investor-aligned structuring,
Then you haven’t built something bankable.
Ready to Make Your Project Institutional-Grade?
At Tegro Partners, we help advanced energy and industrial decarbonization projects transition from promising to investable. We don’t just advise, we structure, model, and de-risk deals so capital can move with conviction.
If you’re facing investor hesitation, let’s talk.
We’ve helped unlock over $100 million in infrastructure capital for projects like yours — not through hype, but through structure.