‘Each toll road is different’

Do a Google search using the term ‘toll road concession’ together with ‘Macquarie,’ as in Macquarie Group.

In North America, Macquarie, also a proven concessionaire in other parts of the world, has notched one trailblazing toll road lease after another beginning in 1998, when the firm advised a private consortium in its bid for 407 Express Toll Route (407 ETR) in Ontario, handling the valuation aspects.

But in America, Google is liable to list the Indiana Toll Road – a Macquarie asset – on its first page. Ballasted via that $3.8 billion public-private partnership (PPP or P3) and its $1.8 billion Chicago Skyway lease, Macquarie went on to build a multibillion-dollar US toll road portfolio.

Keep Googling and heed the words of Graeme Conway: before investing in each toll road, Macquarie carried out valuations that necessitated what he terms “asset knowledge and sector knowledge”.

“Each toll road is different,” says Conway, senior managing director of Macquarie Infrastructure and Real Assets (MIRA), the infrastructure fund management arm of Macquarie.

Conway, who relocated from London to New York to work for MIRA in the US, points out that each toll road is going to have “a different revenue stream, and different risk”.

Traditional valuation is unhelpful. Discounted cash flow (DCF) methodology, in contrast, is helpful. But assessing toll road risk is specific to investing in public infrastructure. For instance, a toll road might have to vie with a non-toll alternate route, or light rail transit.

“You have to ask: what external to the toll road could [you] factor in? Of that, which are free? That is the risk. You have to factor that risk into the fundamental value of the roll road,” Conway says.

Projecting revenue is also unique when investing in a toll road.

“You can have [the] availability payment structure (APS) where there is no toll and the operator is getting paid based on the asset,” Conway observes. “You can have a partial availability pay — and partial tolling.”

If the kind of due diligence Conway is describing — anticipating whether a competing mode of transportation could emerge, or taking the cost of gas-per-gallon into consideration — is on the face of it daunting or far-reaching, rest assured: the basic premise behind solid investment management is still applicable.

“You have to buy right,” Conway says flatly.

“I am not saying it is ‘easy,’ but it is easier than private equity, and that is a reason it is attractive,” Conway continues. “As a sector, infrastructure asset valuation is easier than much of the broader market.”


The monetization of infrastructure — be it social, sea, surface, or air transportation, or water and wastewater treatment — into a global asset class made tried-and-true Wall Street analysis germane.

For a general partner (GP), infrastructure asset valuation is needed to work out a performance fee for a fund or to establish a final value in a sale, making the asset valuation process a serious business for the likes of $40 billion fund manager Industry Funds Management (IFM).

“Valuation is critical to our open-ended platform,” says Alec Montgomery.

Montgomery, a long-time investment banker who joined IFM in 2008, is based in New York as head of infrastructure in North America. He says being an open-ended institutional fund with $14 billion dedicated to infrastructure is challenging for IFM.

“People who tend to not trust people in fund management are going to assume the valuation of an asset is high,” Montgomery points out. “If the asset is perceived to be overvalued, people will be gone.”

Here, having a quarterly valuation performed by a third-party, a ‘Big Four’ auditing firm, can go a long way, Montgomery explains. He goes on to note that IFM is in the practice of “rotating out” an auditor every three-year period.

Valuation had no small part in luring institutional capital to the asset class in the first place: infrastructure values held up in the global financial crisis (GFC) while the traditional stock market — not to mention the hedge fund space, a supposedly uncorrelated asset class — suffered.

“The attraction is the stability of its cash flow and strength of its cash flow,” Conway explains.

Macquarie is a publicly traded company headquartered in Sydney, Australia, regarded as a pioneering P3 investor and operator. With a market capitalisation totaling more than $14 billion and 14,200 people, Macquarie is a global operation able to draw on its manpower.

“You cannot go on a desktop view, having people on the ground, with knowledge,” Conway says. “We have a large team.”

The process of infrastructure asset valuation also has to be streamlined.

“You have to have a person in charge of bringing it together — the senior analyst,” Conway says. “Contributing to that analysis is people with sector expertise: the financing expert will be providing a view on financing and capital structure; the tax expert will be providing information on taxation.

“In valuation, more detailed due diligence will take place, with independent accounting and legal input. You also get input talking to the banker, chief executive or consultant,” he continues. “Get feedback, look through the data. You need to focus on core risk and compare what has been seen in the past.”

Despite the difference between valuing a toll road (in which customer base and need are factors) and a water or wastewater asset (which is geared toward capital expenditure), Conway would not claim one is harder than the other.

“Of course, valuation for a ‘greenfield’ infrastructure asset could take a three-year period, or longer,” Conway notes.


Unlike a brownfield project, a greenfield P3 would involve managing construction risk, not to mention determining revenue stream and regulation.

“I want to keep a distance from the term ‘valuation,’” stresses Joe Aiello.

Aiello is director of business development in North America for Meridiam Infrastructure, a fund manager based in Paris dedicated to investing in greenfield infrastructure. His reticence is borne of pragmatism: valuation is easily applicable to brownfield. Greenfield is, as Aiello puts it, “completely different…a different world”.

What comes first, Aiello points out, is working with the government office commissioning the P3 to figure out if the initial cost of the project can be minimised.

“You also look at the cost structure on the investment side, as well as the internal rate of return (IRR) and fee structure, and make a judgment about a competitor,” Aiello says.

While a brownfield deal “can go pretty quickly,” Aiello says a greenfield P3 is more time-consuming, not to mention lacking a frame of reference.

“You have a lot more data with a brownfield project and can go into a commercial valuation process,” he says. “On a greenfield deal there is not a lot of operating history. You are trying to make a judgment about the size of the market, where in brownfield you have a long cash-flow profile.

“Plus, the construction price is such an overwhelming factor that making sure a better bread box is being built is as important as the forecast.”

Still, brownfield and greenfield infrastructure asset valuation share a common trait in being a compelling cerebral exercise.

“In investment return, performance is quantitative,” Conway says. “But a decision cannot happen in isolation, there is a qualitative aspect.”

Aiello agrees. “In all, it is a pretty stimulating multidisciplinary world,” he enthuses.