What is Financial Modelling?
Financial modelling is process of developing a mathematical model designed to represent a simplified version of the performance of a financial asset or portfolio of a business, project, or any other investment. Advanced types of models can be built such as discounted cash flow analysis (DCF model), leveraged-buyout (LBO), mergers and acquisitions (M&A) and sensitivity analysis.
Financial modelling is the process by which a firm constructs a financial representation of some, or all, aspects of the firm or given security. The model is usually characterised by performing calculations, and makes recommendations based on that information. The model may also summarise particular events for the end user and provide direction regarding possible actions or alternatives. Financial models can be constructed in many ways, either by the use of computer software, or with a pen and paper. What’s most important, however, is not the kind of user interface used, but the underlying logic that encompasses the model.
What is a financial model used for?
The result of a financial model is used for decision making and performing financial analysis. Financial models will be used to make decisions about:
Project returns (IRR calculations)
Raising funds (debt and/or equity)
Analysing investment assumptions (playing with certain metrics to calculate risk / returns)
Selling or divesting assets
Budgeting and forecasting (planning for the years ahead)
Capital allocation (priority of which projects to invest in)
Asset Valuation / Portfolio Valuation
Who builds financial models in Energy and Infrastructure?
Financial models are required in almost every function relating to the key decisions taken in an asset’s life:
– Whether to invest, develop or finance a project – Investment Management or Financial Lenders will both require complex financial models.
- Looking at how to price the sale of an asset or portfolio – the divesting business will need financial models to maximise their value and the acquiring party will require models to calculate their bid.
- Within Asset Management and Portfolio Performance, Risk Management and group reporting – financial models will be required to check how the asset is performing, benchmarked to expectations.
As a result, Financial Modelling is a highly sought after skill-set. A Financial Modeller might work throughout their career in a wide range of sectors (Infrastructure, Energy, Telecoms, General Business). It is also possible that a financial modeller will move between employment segments; Advisory, Project Developer / Sponsor, Investor, Asset Manager, Lender etc.
For Investors and Lenders, in the early years of an Investment Analyst and Investment Associates career, you will be expected to develop an advanced level of financial modelling. For some, this is an activity they will do less of as they progress through their career (moving from building models to only amending models and finally to simply reviewing and challenging assumptions). The important part is that you can fully understand the process, as the financial model is central to investment decisions. Alternatively, you might decide to pursue a career purely in financial modelling. This career track is common within advisory practices (Top four and Boutique) and becoming more common in-house for larger financial organisations.
What does the future hold for Financial Modelling?
Financial modelling is currently a very time consuming activity. There have been many attempts to drive for automation and standardisation. The latter has seen significant progress with standard and principles adopted from top advisory practices and auditing houses becoming common place – this means that you can pick up a complex model and should be able to understand the structure and the workings of it without too much of an explanation. For automation and the introduction of Artificial Intelligence, this remains an ongoing debate. The challenge thus far is that you cannot fully automate an activity that humans are so heavily influenced to manipulate.
What is Asset Valuation within Infrastructure & Energy?
Asset valuation is the process of determining the current value of an asset or portfolio of assets. Historical data and financial theories provide little guidance on the risk-return profile of the infrastructure and Energy asset class. Unlike listed stocks and shares, there is little reliable data on historical performance.
For infrastructure and Energy assets, practitioners typically use a multiples based approach or an income approach such as Discounted Cash Flows (DCF) to calculate value. As part of the income approach, the Capital Asset Pricing Model (CAPM) is often used to calculate the discount rate applicable to discounting cash flows. As CAPM measures the required return on equities with reference to the performance of the stock market, it’s usage to estimate a discount rate applicable to infrastructure and energy asset cash flows is limited. Therefore, Investors and Lenders use anything from inflation plus margin to a blend of equity and bond indices to measure performance.
Asset valuation is the process of determining the fair market or present value of assets, using book values, absolute valuation models like discounted cash flow analysis, option pricing models or comparables. Such assets include investments in marketable securities such as stocks, bonds and options; tangible assets like buildings and equipment; or intangible assets such as brands, patents and trademarks.
What is the job of the Head of Asset Valuation?
At its most basic, the Head of Asset Valuation will be responsible for guiding and setting group wide valuation methodology. They will coordinate the consolidated group asset valuation processes, liaise with external advisors and audit teams. They might simplify the function into two component parts; Methodology – How do we go about constructing our valuation, where do we take the assumptions from? Valuation process – the act of pulling together the information and consolidating it at the single and multiple asset level.
Example Archived Financial Modelling Vacancies
Financial Modelling Manager – Renewable Energy Fund
Financial modelling manager sought on a contract basis with a renewable energy investment fund. The successful financial modeller will have experience working in renewable energy or infrastructure valuations. You will be equally comfortable supporting the investment team with bid work and the asset management team with valuations.
Head of Financial Modelling – Energy & Infrastructure Fund
Head of Financial Modelling and Asset Valuations team sought by leading international Infrastructure & Energy Fund. The successful Head of Financial Modelling & Valuations will have experience working in renewable energy or infrastructure valuations. You will be comfortable supporting the investment team advising on the economic viability of a range of transactions as well as leading the consolidated asset valuations at portfolio level.
Head of Asset Valuation – Energy & Infrastructure Fund
Head of Asset Valuations team sought by leading international Infrastructure & Energy Fund. The successful Head of Asset Valuations will have experience working in renewable energy and/or infrastructure valuations. You will be comfortable supporting the investment team advising on the economic viability of a range of transactions as well as leading the consolidated asset valuations at portfolio level.