This paper presents the results of the 2017 EDHEC/GIH survey on investor perceptions of infrastructure, revealing infrastructure investors’ medium-term investment intentions, views on market developments, and the efficacy of national infrastructure plans. It also introduces the findings of a new approach to determining the required returns on infrastructure investments required by investors.
The survey provides an annual insight into investors’ perceptions of infrastructure, capturing the changes in their views of the market, expectations of returns, and determining which government/ private initiatives or services are useful to them, or not. It builds on the 2016 instalment and where relevant, provides a comparison to the findings from 2016.
With the support of:
Our survey questions were sent to 500 infrastructure investment practitioners identified by EDHECinfra, termed the infra500. These individuals have had numerous years of involvement in infrastructure investment decisions. Those working in a strategy or investment function, such as in CIO or Head of Infrastructure positions, made up almost 60% of respondents. 23% worked in a top executive function and the remaining in advisory roles. This paper reports the views of 186 of these individuals. More than half of the respondents represent asset managers and asset owners (insurers, pension plans, sovereign wealth funds). The remaining 38% represent commercial and international banks, consultancies, government agencies and rating agencies. Respondents from asset managers make up the largest group (36%). The asset owners that participated in this survey have combined assets under management of approximately USD 7 trillion, representing 10% of the global total. They represent some of the largest investors in the world and have allocations to infrastructure that are higher than the norm. Thus, the views taken in this survey on investment intentions, represent that of more active and sophisticated investors.
90.3% of asset owners intend to increase their investment in infrastructure in the next 3-5 years;
While the majority still do not plan on investing in emerging-market infrastructure, 81.8% of those already investing in emerging markets intend to increase their investment.
Most respondents believe that the US is the next big infrastructure market, followed by Latin America.
There is strong consensus that infrastructure investment will eventually be accessible through individual pension accounts or life insurance products.
Respondents are more well aware of national infrastructure plans in the OECD compared to emerging markets. However those who are well-versed in the plans are more positive about the potential of plans in emerging markets to improve the attractiveness of infrastructure in the country.
The majority of respondents who have taken part in projects supported by project preparation facilities created by MDBs agree that the assistance is of value.
Respondents believe there is value in benchmarking operational performance. The reporting of traffic/demand data was identified as potentially the most useful, followed closely by construction risk metrics and operational efficiency;
When it comes to benchmarking financial performance, respondents identified time-weighted returns and risk-adjusted returns as the most important.¹
The lower and upper bounds on the required return on equity for infrastructure investment in OECD markets are 10% and 12%, respectively. These results are on par with the broad market EDHECinfra equity index;
The mean emerging-market private infrastructure equity premium is between 6% and 7%; l The mean equity bid-ask spread is about 200bps in OECD infrastructure markets, whereas in emerging markets it reaches 270bps;
Among all the variables we tested (geographic region, project life cycle, business model, investor type), regulated emerging-market infrastructure produced the widest range of mean required equity IRR, with 5.2% between the lower and upper bounds² of mean required IRR.
For “core” and “core plus” infrastructure PE Funds in the OECD – the most common type of private infrastructure investment vehicle – asset managers (the GPs) declare requiring 12% but asset owners require 13%;
Only a third of respondents find terminology inherited from the real estate sector such as ”core” and ”core plus” confusing or unhelpful when used to refer to different infrastructure investment profiles.
For a long-term infrastructure equity fund, investing in greenfield and brownfield infrastructure with no additional leverage: Asset owners declare requiring 12% returns and asset managers between 9.6% and 12.9%;
For a private project-debt co-investment platform: Investors require fixed-rate returns in the 4.2-5% range.
Only 10% of respondents find issues with the approach taken by credit rating agencies to rate infrastructure project finance debt.
Greater expectations for national infrastructure plans in emerging markets
Respondents are more well-versed in the national infrastructure plans of OECD countries;
The Juncker/EU Infrastructure Investment Plan (2015-17) and the UK’s National Infrastructure Delivery Plan (2016-21) are the national infras- tructure plans respondents are most well aware of in the OECD – 35% and 22% of respondents, respectively, considered themselves to know these plans very well;
Respondents were not as well aware of national infrastructure plans in emerging markets; Saudi Arabia’s National Transformation Program (2020) and India’s Twelfth Five-Year Plan (2012-17) were the plans known in the greatest level of detail; only 15% and 9% of respondents, respectively, know these plans very well;
However, respondents were more positive about the impact of the emerging-market plans compared to the OECD plans. The average proportion of respondents who believe that the plan improves the attractiveness of infrastructure in the country was roughly 49% for the emerging-market plans, and 42% for the OECD plans;
The plans believed to bring about the most improvement to attractiveness of the country’s infrastructure were Saudi Arabia’s National Transformation Program (2020) for emerging markets, and Chile’s Agenda De Concesiones (2014-20) for the OECD.
No greenfield premium demanded for private infrastructure equity investments
We used the method of contingent valuation which is often used to estimate the willingness to pay or willingness to accept a certain price or situation in non-market goods. With private infrastructure, investments are largely illiquid and investor preferences are seldom revealed in market transactions. Thus, asking investors to state their preferences can be a valid approach to understanding the formation of prices for infrastructure assets.
Questions were tailored to the respondent’s self-identified infrastructure expertise (debt/ equity, OECD/ emerging-market, assets/ products). Projects/ products were described to respondents and they were able to indicate their willingness to invest for a set range of IRRs.
Of the traditional views on risk/ return trade-off in infrastructure investing surrounding geographical region, business model, and project life cycle, the views on geographical region and business model were confirmed by the results i.e. investments in private infrastructure in emerging markets invited a higher equity premium compared to investments in OECD markets (between 6% and 7%), and investors demand a premium to invest in merchant infrastructure (about 150 bps for both emerging market and OECD);
However, we did not find that investors required a premium for greenfield projects, over brownfield;
Questions juxtaposing greenfield and brownfield investments in a single question would naturally yield a different required return for each project life cycle, as the question framing implies that the two investments must be different. However when such question framing is removed, as done in this year’s survey, respondents no longer report a required premium for greenfield investments;
Firstly, construction risks while a significant consideration to investors, may not necessarily demand risk premia. For instance, equity investors in project-finance transactions are mostly protected from construction risk by a fixed price, date-certain construction contract, and cost overruns at the project company level have been shown to be close to zero on average;
Next, the size of construction risks and any related premium, may not be larger than risk premia associated with risks in the post-construction phase of infrastructure projects (e.g. traffic risk or regulatory changes);
Finally, construction risks are almost entirely idiosyncratic.
Divergence in mean required returns between asset owners and asset managers for investment products
The contingent valuation method was also used to determine investors’ required returns for infrastructure investment products;
We asked respondents about 4 products: a traditional infrastructure equity fund, a long-term infrastructure equity fund, a coinvestment infrastructure debt platform, and an index-tracking hybrid infrastructure fund.
Respondents required the highest mean IRR for the hybrid infrastructure fund;
A lower mean IRR was required by investors for the long-term infrastructure equity fund compared to the traditional infrastructure private equity fund;
Additionally, for the long-term infrastructure equity fund, the required returns for asset managers were found to be significantly different from that of asset owners, likewise between asset managers and banks;
Asset managers consider that investors in long-term infrastructure equity funds should be happy to receive returns between 9.6% and 12.9%, whereas asset owners express narrower expectations of 12%;
The wider price bounds for asset managers could be due to expected fee levels, on top of differences in risk preferences.
For the traditional infrastructure equity fund and the co-investment infrastructure debt platform, mean required returns were not found to be significantly different between the different investor types.
1 – The EDHECinfra infrastructure benchmarks fill this particular “data gap” and are currently freely available online at edhec.infrastructure.institute.
2 – The lower bound represents the mean IRR below which investors would not agree to invest, and the upper bound represents the mean IRR above which investors would agree to invest