Investors have been at pains to benchmark unlisted infrastructure investments. However, using better data is now possible. This article was originally published in the Financial Times in April 2021.
Policy Makers still Await Infrastructure Investors
Infrastructure investment is at the heart of many governments’ post-Covid recovery plans, including a green new deal in the US, UK or EU. All such policy initiatives expect to ‘build back better’ with the help of private investors playing an important role in the mobilization of long-term finance. But investors’ ability to access the right data on the fair value, yield and risks of infrastructure investments is essential to the realisation of this vision.
Pension plans and insurers are looking at unlisted infrastructure equity or debt in search of low correlation, high yielding alternatives to bonds and stocks, but have not so far built significant allocations. According to the OECD, the largest 100 pension funds invest 1.3% of their assets on average in infrastructure equity and have almost no exposure to private infrastructure debt. In effect, many investors are still completely new to the asset class despite its likely benefits for long-term investors.
“new research suggests that investors could usefully invest as much as 10% of their portfolio to infrastructure equity or debt”
No Data, No Allocation
One of the reasons for this hesitance has been the paucity of available data. Investors have been at pains to benchmark unlisted infrastructure investments using inadequate listed proxies or private appraisal data that shows suspiciously low levels of risk. Appraisal values are backward looking and as a result, do not reflect the fair value and the risk of investments as priced by markets. Without updated valuations, investors find it hard to understand the yield or the risks of investing in infrastructure. So do prudential regulators, some of which have launched inquiries into the impact of Covid-19 lockdowns on infrastructure investments.
However, using better data is now possible and new research suggests that investors could usefully invest as much as 10% of their portfolio to infrastructure equity or debt.
Since late 2019, thanks to advances in data collection and asset pricing in illiquid markets, EDHECinfra has been producing marked-to-market indices of the performance of several hundred investments in unlisted infrastructure equity, as well as thousands of private infrastructure loans and bonds.
One of the most used indices produced is the infra300, which tracks the performance of a representative set of 300 private infrastructure equity investments in 22 countries. Established investors such as the OECD pension plan, large Canadian, Australian and Nordic investors use this data to design and monitor their infrastructure investment strategy.
Infrastructure has a Role to Play in Portfolios
Using this data, it can be shown that for conservative investors already largely invested in bonds, such as insurers, adding private infrastructure debt to the portfolio can meaningfully lower the cost of hedging liabilities thanks to the higher yield of infrastructure debt, while also improving the risk-adjusted performance of the entire portfolio. Likewise, a more aggressive investor with a focus on seeking performance would benefit most from investing unlisted infrastructure equity and, with the optimal weights, would allocate one tenth of its portfolio to this asset class.
These results suggest that private investment in unlisted infrastructure equity and debt could be many times larger than they currently are and provide meaningful support to recovery plans. This data also shows that unlisted infrastructure creates genuine benefits within the portfolio.
New infrastructure investment programs create significant opportunities for institutional investors, but these can only be realized within portfolios that reflect the true yield and risk of this asset class. With better information becoming available, governments can look forward to more institutional investor participation in the financing of long-term growth.