This article discusses the valuation of a brownfield infrastructure asset. For those who are not familiar with NPV and IRR, I suggest you do some research on these topics before reading on.

What is a brownfield infrastructure asset?

An obvious but important question. A brownfield infrastructure asset can typically be described as an asset that has been built and is fully operational. For example, a power plant that has been commissioned and is operating would be considered a brownfield infrastructure asset.

Why would you want to value a brownfield infrastructure asset?

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

  1. accounts – you may need to find the value of the asset to include on your balance sheet.
  2. Performance Fees – Maybe you’re working in an infrastructure fund and want to estimate how much your company would earn in performance fees.
  3. For a possible sale – where you are looking to sell an equity interest in the infrastructure asset and want to know how much it is worth.

What do we need to create an assessment?

  1. Net cash flow – To value an asset (or at least your equity interest in that asset) you need net cash flows. In most cases, the valuation of an infrastructure asset revolves around the valuation of equity, so you should consider injections and payments of equity and shareholder loans.

  2. Discount rate – For those of you who are not familiar with the word discount rate, it is generally used in infrastructure valuation to express the return for which a potential investor would purchase the asset. You can think of the discount rate simply as the internal rate of return (IRR) that 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 conduct a brownfield infrastructure asset valuation

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

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

  • comparative evaluation of similar assets
  • building the discount rate from the fundamentals: this looks at the risk-free rate in the country, liquidity risk, operational risk, regulatory and legal risk, to name a few.

If you still can’t find a suitable discount rate, you may 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. Please watch the YouTube video below for an example to solidify your understanding.