Brownfield Infrastructure Asset Valuation

This article looks at the valuation of a brownfield infrastructure asset. For those not familiar with NPV and IRR I suggest that you do a bit of research on these subjects prior to reading on.

What is a brownfield infrastructure asset?

An obvious question but an important one. A brownfield infrastructure asset can typically be described as an asset which has been constructed and is in full operations. For example a power plant which has been commissioned and is operating would be considered a brownfield infrastructure asset.

Why would you want to value an brownfield infrastructure asset?

There are a number of reasons you may want to value an infrastructure asset. Some of these reasons include:

Accounts – you may need find the asset value to include in your balance sheet.

Performance Fees – maybe you’re working in an infrastructure fund and want to work out how much your firm would earn in performance fees.

For a potential sale – where you are looking to sell an equity stake in the infrastructure asset and you wish to know how much it is worth.

What do we need to create a valuation?

Net Cash Flows – in order to value an asset (or at least your equity stake in such an asset) you need net cash flows. In most instances an infrastructure asset valuation revolves around equity valuation so you’d look at equity and shareholder loan injections and payments.

Discount Rate – For those of you who are not familiar with the word discount rate, it is typically used in infrastructure valuation to express the return that a potential investor would buy the asset for. You can think of the discount rate simply as the internal rate of return (IRR) which a potential buyer would accept. The lower the IRR a buyer is willing to accept the higher the price they are willing to offer.

How to perform a brownfield infrastructure asset valuation

Now that you understand the fundamentals the first thing you need to do is work out the asset cash flows. As mentioned these are typically the equity and shareholder loan cash flows and can be found in the operational model (hopefully you should have one).

When you’ve identified the net cash flows which you want to value the next step is to find the discount rate for the asset. Now this is the tricky part and it is often subjective. The lower the risk of the net cash flows the lower the return that should be required by a potential investor. The discount rate can be found by:

benchmarking similar assets

building the discount rate from fundamentals – this looks at the risk free rate in the country, liquidity risk, operational risk, regulatory and law risk to name a few.

If you still can’t find a suitable discount rate you might want to do a range.

Once you have the net cash flows and the discount rate you can easily find the value of the asset by doing a simple net present value (NPV) calculation. Check out the YouTube video below for an example to consolidate your understanding.