EDHECinfra Post
An asset class is born
Publication date: 2019-07-17

The next generation of EDHECinfra indices is ready. They are computed quarterly, use meticulously curated private data for hundreds of companies in the 25 most active markets in the world, and cutting-edge fair value asset pricing methods.

A key element in this project was the definition of the universe. Infrastructure may not be easily defined but infrastructure investment has to be.  When we started working on this topic at EDHEC we decided to focus more on what “infrastructure investment is like” i.e. what drives risk and less on what “infrastructure does” (move people or electricity from A to B, etc).

This is because at the heart of any financial investment decision lies the trade-off between risk and future value. Even in highly illiquid, opaque private markets, as we show in a series of new papers the systematic factors driving prices in unlisted infrastructure debt and equity, investors make choices that reflect perceived risks and price these risks accordingly.

Hence, a classification of broad risk families found in infrastructure was a key starting point to the creation of The Infrastructure Company Classification Standard (TICCS). Immediately adopted by the industry from the largest asset owners and managers to multilateral institutions and standard setters, TICCS is a four-pillar taxonomy that captures the different types of business risks, industrial activity, geo-economic exposure and corporate governance that characterise infrastructure companies.

TICCS thus provides the building blocks for the definition of key market segment indices but also to build custom benchmarks for investors with different infrastructure strategies and exposures. Indeed, because of its size and illiquidity, the broad market infrastructure sector remains un-investable. Instead, asset owners and managers are exposed to a various combination of assets aggregated over time, following a more or less well-defined strategy.

TICCS allows building custom benchmarks to understand the risks of existing strategies and defining new ones.

Adding adequate benchmarks to the infrastructure investment process will be an important innovation. As our annual survey demonstrates, most investor use highly inadequate benchmarks and they know it.

We conducted one of the largest survey ever made of infrastructure asset owners and managers in 2019 and found that most investors use absolute benchmarks or listed infrastructure indices to determine their investment strategy, monitor performance and manage risk.

The vast majority of respondents also acknowledge major issues with their infrastructure benchmarking practices: current benchmarks are not representative, do not measure risk, do not allow investor to target or define a strategy and do not offer much information about correlations with other asset classes.

Without adequate benchmarks, the development of a global infrastructure asset class, which is one of the objectives of the G20, is necessarily limited, if not compromised.

This situation will evolve and, in all likelihood, improve with the development of the asset class. One could make comparisons with the development and gradual improvements made in other alternative asset classes that began to attract institutional investors a couple of decades ago such as real estate or hedge funds.

Long-term investment in illiquid assets creates a demand for monitoring (as the alternative to trading in and out of the asset class) and as better databases and benchmark offerings are created, growing and successful alternative asset classes like infrastructure begin to the long road towards maturity, transparency and better benchmarks.

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