Is infrastructure different? Evidence from 15 years of cash flow data

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In this video, we discuss the first large scale empirical analysis of the characteristics of revenue and profits in private infrastructure firms from their new paper, “Revenue and dividend payouts in privately held infrastructure investments”, drawn from the EDHEC-Meridiam/Campbell Lutyens Research Chair on private infrastructure equity investments.

We make use of a new and unique set of hand-collected dataset covering the cash flows of more than 330 UK infrastructure firms going back 15 years and test two ideas: whether infrastructure firms correspond to a different business model than other firms active in the economy, and whether they exhibit different equity payout behaviour.

We test a sample of several hundred infrastructure firms, comparing them with a “matched sample” of non-infrastructure firms in the UK, which are both private and listed and control for the effect of ownership structure and corporate governance on the behaviour of infrastructure firms by building control groups for each one of their infrastructure firm type, to effectively test the “uniqueness” of infrastructure investments.

We look at the volatility of revenues in infrastructure firms as well as their relative correlation with macro factors, such as GDP growth, inflation or financial markets. We also study the equity payout behaviour of infrastructure firms, relative to the business cycle as well as to other private and public firms.

We are able to successfully categorise infrastructure firms into distinct business models, namely, “contracted”, “regulated” and “merchant” infrastructure, each with its own unique cash flow dynamics, but also very different to compared with the rest of the corporate universe.

Test results show that infrastructure firms indeed exhibit lower revenue volatility, higher payouts, with considerably less correlation with the business cycle and are indeed unique.

The findings of this paper have implications for investment management and prudential regulation and can be used to calibrate cash flow models to develop fully-fledged infrastructure investment benchmarks, which are the next planned output of the new EDHEC-LTIIA Research Chair.

→ Read the paper online here