1. Separating Real and Nominal Effects
Traditional DCF models often blur the lines between real cash‑flow growth and nominal
inflation. Our framework explicitly decomposes value into:
- Real demand growth (e.g., traffic, volume, utilization).
- Contractual inflation pass‑through (indexation, escalators).
- Changes in the real risk‑free rate and risk premia.
2. Building a Rate‑Sensitive Discount Curve
Instead of a single WACC, we use a term structure that reflects how risk is distributed over
time—for example, construction vs. operating risk.
- Near‑term cash flows discounted at higher rates if construction or ramp‑up risk is
material.
- Long‑dated contracted cash flows discounted closer to real risk‑free plus a stable risk
premium.
- Sensitivity analysis around terminal value assumptions and re‑investment risk.
3. Practical Implications for Deals Today
We apply the framework to stylized examples in renewables, digital infrastructure, and
transportation, illustrating how fair value can move even when headline yield looks
unchanged.
- Assets with full CPI indexation may justify higher valuations than those with fixed
escalators, despite similar current yields.
- Projects with significant residual merchant exposure require a higher real risk premium,
especially when forward curves are volatile.
- Leverage is most valuable where cash flows are resilient under stress tests, not simply
where spreads are wide.