Infrastructure: formula sheet

Key formulas

Economic infrastructure

Transportation + Utilities + Communication (and similar)

Supports economic activity. Revenue often depends on user demand or regulated tariffs.

Social infrastructure

Education + Healthcare + Justice and public housing (and similar)

Supports society's wellbeing. Often paid by availability payments from government, so less demand risk.

Core traits checklist

High barriers to entry + essential service + long life + stable long-term cash flows + inflation linkage + illiquidity

Use as a memory list. Each trait is typical, not guaranteed for every asset.

Greenfield risk-return rule

Greenfield: higher risk → higher required return; Brownfield: lower risk → lower required return

A tendency, not a law. A well-contracted greenfield project can be less risky than a weak brownfield one. Say 'generally'.

Cash flow profile

Greenfield: negative early cash flow, then positive (J-curve); Brownfield: positive current income from the start

Use this to judge suitability for income-focused investors.

Main risks by stage

Greenfield: construction + permitting + ramp-up demand + financing; Brownfield: operating + regulatory + demand + refinancing

Construction risk is the main item that largely disappears in brownfield.

Simple yield comparison

Cash yield = annual distributable cash flow ÷ invested capital

Near zero for greenfield during construction; meaningful for brownfield from the start.

Access-form decision rule

Control and low fees ↔ direct; diversification and expertise ↔ fund; liquidity and low minimum ↔ listed

A qualitative rule. Always link the choice to the client's constraints.

Debt vs equity ranking

Senior debt < subordinated debt < equity (risk and expected return)

Debt has priority in the capital structure. Equity absorbs losses first.

Net return to investor in a fund

Net return = gross asset return − management fees − carried interest − fund expenses

Direct investment avoids fund-level fees but adds own costs.

Total return decomposition

Total return ≈ income yield + capital growth

Brownfield: mostly yield. Greenfield: mostly capital growth after completion.

Debt service coverage ratio

DSCR = cash flow available for debt service ÷ (interest + scheduled principal)

Below 1.0 means cash flow cannot cover debt service. Lenders set minimums as covenants.

Real cash flow growth

Real growth ≈ nominal growth − inflation

If tariffs rise by less than inflation, real cash flow falls.

Present value of the asset (DCF)

Value = Σ CFt ÷ (1 + r)^t + TV ÷ (1 + r)^N

CFt is forecast cash flow, r is the risk-matched discount rate, TV is terminal value at year N. Use cash flows and rate that match (firm with WACC, equity with cost of equity).

Terminal value (growing perpetuity)

TV at N = CF(N+1) ÷ (r − g)

Only valid for r > g and for assets with indefinite life. For a fixed-term concession, use the remaining cash flows or the expected residual value instead.

Free cash flow to the firm (simple form)

FCFF = EBITDA − taxes − capex ± change in working capital

Include maintenance and expansion capex. Infrastructure assets need steady reinvestment, so ignoring capex overstates value.

Discount rate build-up (equity)

r = risk-free rate + risk premium for the asset's risks

Raise the premium for construction, merchant, regulatory, country and leverage risk. Lower it for contracted, inflation-linked, creditworthy counterparties.

Weighted average cost of capital

WACC = E/V × re + D/V × rd × (1 − t)

Use for FCFF. Leverage in infrastructure is often high and changes over time, so check whether a constant weight is realistic.

Net return to LP

Net return = Gross return − management fees − carried interest − fund expenses

Compare managers on net-of-fee returns, not gross.

Management fee

Fee = fee rate × (committed or invested capital)

Fees on committed capital cost more early, when little is invested.

Carried interest with hurdle and full catch-up

Carry = carry rate × total profit, once the catch-up is complete; before the hurdle is met, carry = 0

Without a catch-up, carry applies only to profit above the hurdle.

Total value to paid-in capital (TVPI)

TVPI = (distributions + remaining value) ÷ paid-in capital

Ignores timing, so pair it with IRR.

Income yield

Yield = cash distributions ÷ invested capital

Shows the income component of total return.

Smoothing effect

Smoothed volatility < true volatility; measured correlation < true correlation

A qualitative rule: appraisal-based data understate risk.

Quick revision

• Infrastructure: long-lived, essential-service assets, often with high barriers to entry.
• Greenfield means built from scratch; brownfield means already built and operating.
• Greenfield carries construction and ramp-up risk, with higher potential return and less early income.
• Brownfield usually offers more stable, earlier cash flows and lower risk.
• Investment forms: direct (control, high cost and effort), fund (diversified, fees), listed (liquid, market volatility).
• Contracted and regulated revenues are more predictable than demand-driven ones.
• Key risks: construction, demand, regulatory, financing, counterparty, environmental.
• Due diligence tests the contracts, regulation, cash flow assumptions and the manager.
• Match the valuation method to the asset's cash flow profile and stage.
• Always assess returns net of fees, and check how fees are structured.
• Infrastructure suits clients with long horizons and tolerance for illiquidity.
• In essays, answer the command word first, then give a brief reason tied to the client.

Common mistakes

• Classifying a toll road or airport as social infrastructure. Fix: Social means education, healthcare, justice and housing. Assets supporting commerce and movement are economic.
• Saying all infrastructure has stable, low-risk cash flows. Fix: Check the revenue model. User-demand assets and assets under regulatory or political change carry real risk.
• Saying greenfield always has a higher return than brownfield. Fix: Say greenfield has a higher required or target return to compensate for higher risk. Actual returns can be lower if the project fails.
• Saying brownfield assets have no risk. Fix: Name the remaining risks: operating, regulatory, demand, interest rate and refinancing risk.
• Treating listed infrastructure as having the same risk profile as private infrastructure. Fix: Remember listed prices reflect equity market moves and are more volatile and liquid. Say so.
• Recommending direct investment for a small investor. Fix: Check size and expertise first. Direct needs large capital and skills, and brings concentration.
• Saying all infrastructure has full inflation protection. Fix: State that protection depends on tariff escalators, regulator lags and contract terms. Fixed-tariff assets lose real value.
• Assigning construction risk to brownfield assets. Fix: Construction risk is mainly greenfield. Brownfield risk is more about operations, demand and regulation.
• Using one discount rate for every phase of a project. Fix: Use a higher rate for construction-phase or merchant cash flows and a lower rate once the asset operates under stable contracts, if the question gives different risks.
• Adding a perpetuity terminal value to a fixed-term concession. Fix: Read the concession end date. If the asset reverts to the grantor, use zero or the stated residual value.

Exam tips

• Know the economic versus social split cold. Classification questions are quick points if you do.
• When asked to justify, give the trait and the client link in the same sentence.
• Qualify claims with words like often or typically. Absolute statements on cash flow stability or inflation protection can be wrong.
• Always check the client's liquidity and horizon before saying infrastructure fits.
• In essay answers, answer the command word in the first line, then add support.
• Always anchor the recommendation to the client's income need, horizon and risk tolerance; this is where the points are.
• Use the word 'generally' when stating the risk-return link, and name the specific risk (construction, ramp-up, regulatory) rather than just 'risk'.
• In essay sets, answer only the number of points asked for, in the order given, and keep each response to one or two sentences.