A panel of investors and advisors urged delegates at the Terrapinn Infrastructure Investment World Americas conference in New York to think beyond traditional distinctions for infrastructure assets such as “brownfield” versus “greenfield”.
Existing assets are typically referred to as brownfields, while those that have to be built are known as greenfields. Of the two, brownfields have traditionally been viewed as less risky, as greenfields often require investors to take on permitting, planning and construction risks.
However, speakers at the Terrapinn conference strongly challenged this conventional wisdom. “A greenfield could have lower risk than a brownfield project, so it’s not always correct to say that brownfield is less risky,” Barbara Weber, founder of advisory firm Bibs Capital, told delegates.
As an example, she pointed to a case study of an onshore wind development project by European private equity firm Platina Partners. The project had low market risk since Platina had a guaranteed buyer for the energy produced for a 20-year period.
“Almost all projects, the biggest risk is the market risk,” Weber said.
Construction risk was also low and the cost per project was significantly lower during the greenfield phase (€1 million to €2 million per project) than during the brownfield phase (€15 million to €50 million per project), making it a more attractive greenfield investment than a brownfield investment. “Brownfield does not mean low risk,” she said.
Weber said institutional investors should not assume that a fund which advertises itself as brownfield-focused is automatically a lower-risk commitment than a greenfield-focused fund. Investors should look at each project in their respective portfolios and make their own determination as to how risky they are.
On that front, she advised investors to focus on the structure of the investment rather than the type of asset, such as airport, port or road. She said mature private finance initiative or public-private partnership structures will typically have a nominal gross return of 6 percent to 10 percent – regardless of asset type – versus 10 percent to 14 percent for mature, general infrastructure assets.
Infrastructure investments: structure matters.
Although he disagreed on some points with Weber, HSBC Specialist Investments director James Hall-Smith, who oversees the firm’s newly launched €500 million environmental infrastructure fund, added that the brownfield vs. greenfield distinction is “too simplistic”, and said project risk should be judged on an individual basis, rather than which category it belongs to.