Harris KhanA brownfield (also known as “brown-field”) investment is when a company or government entity purchases or leases existing production facilities to launch a new production activity. The clear advantage of a brownfield investment strategy is that the buildings are already constructed.
What is Brownfield Strategy?
As a company, it is natural for you to want to grow and eclipse your current subsidiary buildings to grow your business. This is where an investment of brownfields becomes beneficial. Generally, brownfield properties are located in high trade areas with access to the necessary infrastructure and a network of suppliers and customers in place.
One of the best things about brownfields is the work that is already done for you. Most companies are not interested in investing in new production activities. After all, there are a myriad of other alternatives that are cheaper to set up a new business. But with brownfields, the heavy lifting is already done.
As a company, you do not have to spend a lot of money on constructing new buildings and therefore, can use your money to improve the equipment and facilities already in place.
Three main principles should be considered when deciding whether or not to invest in brownfields:
Leveraging of existing facilities and equipment
It is almost always cheaper to purchase existing facilities and equipment rather than constructing new ones. In addition, existing facilities and equipment can be used more effectively and efficiently when operated by the existing management team.
Be careful, however, not to buy a company that is on the brink of collapse. Pay the required due-diligence to avoid wasting your money.
High business and market potential
The business and market potential of the brownfields is critical. Often, companies are established in markets where the level of competition is low. High business potential means that potential growth through the introduction of more facilities and equipment is high.
Ability to sell at a better price
A third principle to consider is that the brownfields investment enables you to sell assets at a higher price than would normally be the case. In addition, you get a “double bang” out of your investment, as you can both create jobs and gain better pricing (and profits).
Brownfields are sought out, especially between companies in different industries. The combination of industry expertise and the right opportunities can make your investment a lucrative one.
Examples of Brownfield Investment
Brownfield investments are prevalent worldwide. The first brownfields investments were made in Europe in the 1980s, with single companies investing in existing assets.
Since then, private equity firms have increasingly invested in brownfields. The reason: brownfield investments offer a wider range of assets at a cheaper price.
Brownfield investments are also prevalent in the United States. For instance, once derelict factories and warehouses in Chicago and New York City are now inhabited by start-up businesses. Often, these warehouses have been converted into loft apartments or residential and commercial blocks.
Why are Brownfield Investments on the Rise?
There are several factors driving the growth of brownfield investments in the US and Europe. For one thing, the commercial real estate market is likely to remain the weakest until 2018. Investors who have a healthy amount of liquidity will be looking for better opportunities to deploy their capital.
Additionally, the commercial real estate industry is currently undergoing a transformation. Defense companies that demand empty space are being phased out. So is manufacturing. The result? A flurry of empty space that has to be used for something.
Lower risk for investment
Investing in brownfields is less risky than investing in another business. This is because the market will assess a brownfield with an open mind. Anything can be done with the right management and capital expenditure.
For instance, the value of a residential building is not defined solely by the profitability of the enterprise. An owner of a residential building can also obtain a commercial property designation.
Cons of Brownfield Investments
Not all investment opportunities turn out to be profitable, and brownfield investment is no exception. There are two main disadvantages to investing in brownfields:
Difficulty accessing funding
It is more expensive to invest in brownfields, as it is more difficult to access loans or funding. Additionally, servicing and refinancing the loan can be tricky and expensive too.
It is more expensive to invest in brownfields, as it is more difficult to access loans or funding. Additionally, servicing and refinancing the loan can be tricky and expensive too. Poor management and inefficient use
Bad management is a constant issue for companies making brownfield investments. Additionally, a company can suffer from a lack of efficient and cost-effective equipment.
How to Make Brownfield Investments Successful
When making a brownfield investment, there are several factors that you should keep in mind:
Perform thorough due diligence
The due diligence process is important, as it helps ensure that you are not making a bad investment. The due diligence process involves making inquiries regarding the condition of the property, as well as conducting background checks on the developers, management team and owners.
The due diligence process is important, as it helps ensure that you are not making a bad investment. The due diligence process involves making inquiries regarding the condition of the property, as well as conducting background checks on the developers, management team and owners. Determine how to collapse the strategy
Brownfield investment is not a one-way street. There is a proper procedure you should be aware of. As an investor, it is crucial that you understand how to enter and exit your investments. Be sure to determine which exit strategy to use – whether direct sale, leaseback, joint venture or a stock swap.
Brownfield investment is not a one-way street. There is a proper procedure you should be aware of. As an investor, it is crucial that you understand how to enter and exit your investments. Be sure to determine which exit strategy to use – whether direct sale, leaseback, joint venture or a stock swap. Tighten the management team
According to Jim Collins, the author of the book, “Good to Great,” it is essential to “get the right people on the bus.” Not all people are cut out to lead or manage. It might be cheaper, but it is not worth hiring cheap and inexperienced workers. When making brownfield investments, tighten your management team and re-invest your capital back into your business.
According to Jim Collins, the author of the book, “Good to Great,” it is essential to “get the right people on the bus.” Not all people are cut out to lead or manage. It might be cheaper, but it is not worth hiring cheap and inexperienced workers. When making brownfield investments, tighten your management team and re-invest your capital back into your business. Invest in existing facilities and equipment, but work on improvement
If you are not looking to be in the business for the long haul, you can definitely take your foot off the gas. Instead, look to sell off your investments once your returns have been maximized.
Brownfield Strategy Summary
Brownfield investment is a tried and tested business venture allowing companies to turn a profit. It is especially effective for those that want to grow their business without opting for a long-term risky revenue venture. Through brownfield investment, you can leverage on the work done by others while using your existing facilities and equipment.
Brownfield investments are on the rise not only because of the low-risk involved, but also the high profitability rate your business can achieve. Brownfield investment is an excellent business strategy to pursue.
Conclusion
As we look to the future, brownfield investments will become more popular. Companies that can capitalize on this opportunity will benefit as they rejuvenate obsolete facilities and make them productive.
