Building benchmarks for infrastructure investors

EDHECinfra was created to address the profound knowledge gap faced by infrastructure investors by collecting and standardising private investment and cash flow data and running state-of-the-art asset pricing and risk models to create the performance benchmarks that are needed for asset allocation, prudential regulation and the design of infrastructure investment solutions.
Majid Hasan
Senior Reserarch Engineer
majid.hasan@edhec.edu
#asset pricing
Sharyn Chang
Infrastructure Data Analyst
sharyn.chang@edhec.edu
Qi Wang, PhD
Senior Reserarch Engineer
qi.wang@edhec.edu
"statistics alive!"
"the infrastructure adventure"
Frederic Blanc-Brude, PhD
Director
frederic.blanc-brude@edhec.edu
Christy Tran
Infrastructure Data Analyst
christy.tran@edhec.edu
"Mr Data"
Tim Whittaker, PhD
Associate Research Director
tim.whittaker@edhec.edu
"I build bridges too."
Grace Chen
Senior Relationship Manager
grace.chen@edhec.edu
Aurelie Chreng
Senior Reserarch Engineer
aurelie.chreng@edhec.edu
#portfolio design
Jing-Li Yim
Infrastructure Data Analyst
jing-li.yim@edhec.edu
Terrance Teoh
Information Systems Manager
terrance.teoh@edhec.edu
Silvia Garcia
Infrastructure Data Analyst
silvia.garcia@edhec.edu

What we do

Collecting and analysing data

We collect, clean and analyse the private infrastructure investment data of the project’s data contributors as well as from other sources, and input it into EDHECinfra’s unique database of infrastructure equity and debt investments and cash flows.We also develop data collection and reporting standards that can be used to make data collection more efficient and reporting more transparent. This database already covers 15 years of data and hundreds of investments and, as such, is already the largest dedicated database of infrastructure investment information available.

Designing cash flow and discount rate models

Using this extensive and growing database, we implement and continue to develop the technology developed at EDHEC-Risk Institute to model the cash flow and discount rate dynamics of private infrastructure equity and debt investments and derive a series of risk and performance measures that can actually help answer the questions that matter for investors.

Building reference portfolios of infrastructure investments

Using the performance results from our asset pricing and risk models, we can report the portfolio-level performance of groups of infrastructure equity or debt investments using categorisations (e.g. greenfield vs brownfield) that are most relevant for investors’ investment decisions.

International Advisory Board

As is the case for all research at EDHEC, the work of the Infrastructure Institute is the object of a double validation process: academic validation (internal and external) and industry validation. The second leg of this process is driven by an Advisory Board of high-level individuals who are convinced about the role of applied research in financial practice and committed to providing feedback and to steer the research of the Institute.

  1. AIA, Mark Konyn (Chief Investment Officer) & Mr Tan Soo Thiam (Regional Director of Investment Management – Fixed Income Group Investment)
  2. Abu Dhabi Investment Council, Adriaan Ryder (Chief Investment Strategist)
  3. AP2, Tomas Franzen (Chief Strategist)
  4. Aviva, Ian Berry (Head of Infrastructure) & Laurence Monnier, Head of Strategy and Research
  5. Caisse de Depots du Quebec, Dave Brochet (Head of Infrastructure Risk and Managing Director, Asia)
  6. CalSTRS, Mr Paul Shantic, Director, Inflation Sensitive
  7. Clifford Capital, Premod Thomas (Head of Strategy) & Richard Desai (Chief Risk Officer)
  8. FWD Life, Paul Carrett (Group Chief Investment Officer)
  9. Government Investment Corporation of Singapore, Chia Tai Tee (Chief Risk Officer) & Tan Hsiao Mein (Senior VP, Risk & Performance)
  10. Kernmantle Advisors, Ajay Sawhney (CEO)
  11. NTUC Income, Mark Wang (Senior Vice President & Chief Investment Officer)
  12. OPTrust, James Davis (Chief Investment Officer)
  13. Prudential (Eastspring), Tony Adams (Head of Infrastructure)
  14. QSuper, Brad Holzberger (Chief Investment Officer)
  15. Sun Life Financial Asia, Sancho Chan (Chief Investment Officer and Head of ALM)
  16. Swiss Life, Christoph Manser, Head of Infrastruture
 

The benchmarks: Frequently Asked Questions

Badly. In its 2016 survey of infrastructure asset owners and managers , we found that the immense majority of investors think that current options for benchmarks are utterly lacking.

Not really.

On the private debt side – and infrastructure is mostly about debt –very little usable benchmarks exist as the recent debates around the calibration of Solvency-II have shown. Rating agencies have documented default frequencies in certain classes of private project debt but this is insufficient to arrive a full-scale valuation results of the kind that are required to build investment benchmark.

One the equity side, investors have been using combinations of public equity indices – so-called “listed infrastructure” – and indices created by average the internal rates of return of private assets. But neither are good solutions.

In the first case (listed infrastructure indices), it fails to capture the characteristics of private infrastructure projects. In general, these indices have proven to be extremely concentrated in a few stocks and to be more volatile than the market as a whole.

In a recent paper , we show that for a large, well-diversified investor exposed to capital market instruments available globally, in the US or in the UK, adding “infrastructure” to the portfolio does not shift the efficient mean-variance frontier. In other words, it does not improve diversification.

From a factor investing perspective, an “infrastructure sector” filter applied to public equities is unlikely to be the most efficient way to gain exposure to remunerated risk factors. The question is not “what is the infrastructure investor factor?” but “what combination of remunerated factor exposures can be accessed through infrastructure investments?”

The second option, which consists of averaging the internal rate of return of a group of private projects is even more problematic. First, these rates of return spring from the net asset value reported for individual assets. As is well documented in the academic literature, appraisal-based net asset values tend to be very “stale” – they seldom change because they embody a simple cash flow forecast and an ad hoc choice of discount rate which does not necessarily reflect the riskiness of the investment. So return volatility is “smoothed” and you end up with promises of high returns with little or no risk, which is dubious.

Second, as every corporate finance textbook can attest, you cannot simply average IRRs!

More generally, the benchmark construction part of the question is completely ignored with this approach. For all we know the reported performance could be that of a single large asset in the basket.

EDHECinfra is developing explicit portfolio construction rules for benchmarks of highly illiquid assets.

Data collection: Frequently Asked Questions

EDHEC infra collects cash flow data and the characteristics of underlying infrastructure projects and ”single-asset” firms and utilities.

We do not collect data on investment funds or cash flows in and out of investment funds.

The relevant data falls into three categories:

  1. Data corresponding to investments’ characteristics and the systematic determinants of their financial performance;
  2. Forecast equity and debt cash flow data;
  3. Realised equity and debt cash flow data.

Further details about the EDHECinfra data collection template can be here.