The Rise of “Fake Infra”

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In open letters to the chairman of the European Securities and Markets Authority (ESMA) and the chairman of the Securities and Exchange Commission (SEC) in the United States, EDHEC has called on regulators to take measures against the risks of investment in so-called `listed infrastructure’.

This call follows the publication by EDHEC of a position paper entitled “The rise of “fake infra”: The unregulated growth of listed infrastructure and the dangers it poses to the future of infrastructure investing.”The position paper documents the rise of the so-called listed infrastructure asset class, which EDHEC considers to be an ill-defined series of financial products. Initially targeting retail investors, and increasingly institutional investors, listed infrastructure now represents close to a third of the infrastructure investment sector.

“We strongly recommend stricter regulatory oversight of listed infrastructure products, including the obligation to include the word ‘listed’ in their name to avoid misleading investors,” says Frederic Blanc-Brude, Director of EDHECinfra, “as well as the obligation to include information in marketing documents warning investors that listed infrastructure may not deliver the same performance as unlisted infrastructure investments.”

The EDHEC paper finds that active listed infrastructure managers have invested in close to 1,900 unique stocks over the past decade, many of which cannot possibly be considered ‘infrastructure’ under any definition.

“We believe in the potential of infrastructure debt and equity investment for asset owners,” says Dr Blanc-Brude, “but today’s “fake infra” will disappoint. It is comparatively expensive and will leave investors without the promised low-risk, stable, inflation-linked returns. As a result, it could give infrastructure investing in general a bad name.”

“Serious research shows that listed infrastructure is failing to deliver on its many promises and, in our view, the number of false claims made about listed infrastructure products is high enough to consider a case of mis-selling,” adds Prof Noël Amenc, Associate Dean for Business Development at EDHEC. “Our and others’ research shows repeatedly that listed infrastructure, as it is proposed to investors today, exhibits high drawdown and volatility, does not have better risk-adjusted performance than broad stock market indices and can typically be explained away by a series of well-known factor-tilts available to investors throughout the stock market.”

The paper is available to download here

The open letter to the ESMA chairman can be found here