2020Q1 Index Release: Covid-19 lockdown highlights the importance of understanding risk in unlisted infrastructure investments

Q1 2020 Release of the EDHECinfra Indices Infrastructure businesses are usually impacted by the tail end of recessions: demand for essential services flags, public counterparty risks increase and even long-term financing may become hard to come by. This crisis is different. Like a well-prepared military assault, it began by taking out all key transport infrastructure. The impact of the oncoming economic recession on infrastructure assets will only come later. The Q1 2020 release of the EDHECinfra unlisted equity indices catches the impact of the Covid-19 lockdown on hundreds of unlisted infrastructure companies in 22 countries as of March 31st 2020. The Infra300 equity index, which is designed to capture the structure of the investable universe, is down at -6.37% on the quarter, very close to the Global Unlisted Equity Index which reports a weighted average return of -6.34%. Both index includes a substantial exposure to the ‘merchant’ business risk bucket (TICCS-BR2) which was the most directly impacted by Covid-19 lockdown. The Merchant Infrastructure Equity Index returned -9.15%, while the Advanced Economies Unlisted Airport Index (equal weights) further slumped at -10.16% quarterly returns. The Unlisted Road Index (equal weights) reaches -13.67% for 2020Q1. Despite lower base rates in most countries, discount rates (IRRs) have jumped by more than 80bp on average (50th centile) up to close to 250bp for the top of the distribution. The average unlisted infrastructure risk premia now stands at 6.84%, substantially higher than at the end of …

Covid-19 impact in infrastructure companies future revenues – Q1 2020 estimates

By Jack Lee – Deputy Head of Data In response to the coronavirus Covid-19, many governments have put their nations into “lockdown” measures and/or strict movement controls. These inevitably have a knock-on effect on various infrastructure business models and their relevant investments. The business models most impacted include merchant and regulated arrangements, as per the TICCS® Business-Risk Classification, where revenues depend on the level of activity, making an investment more susceptible to external economic shifts. This is in contrast with contracted business models, where the income derives from fixed and pre-agreed amounts that are stated within a contract. This latter type should be far more insulated from shifting economic developments. We have further filtered these companies based on the TICCS® Geo-economic Classification, and selected only those exposed to regional and global economic factors. We also included companies situated in countries under nationwide lockdown where we consider that both national and sub-national geo-economic elements will also come under pressure. So far, we have also excluded social infrastructures from consideration. Our reasoning is that most of the assets within this Industrial Superclass, including the majority of Stadiums, are structured as contracted business models, providing some financial insulation as described above. However, a handful of social infrastructure companies within our sampled universe are structured as merchant business model, but these are not situated in countries currently under lockdown measures. We consider that it is too soon to make revenue forecasts for these names. …

Know your TICCS®, understand your risks

Infrastructure index provider EDHECinfra releases 2020 version of its industry-backed infrastructure investment taxonomy, which enables investors to build customised benchmarks reflecting the true risk exposures of their infrastructure portfolios. Since its launch in 2018, The Infrastructure Companies Classification Standard or TICCS® has become an industry standard and is widely used by infrastructure investors to categorise their assets and better understand their risk. TICCS® is built using objective criteria including the business model, industrial activity and corporate structure of individual companies. Today, EDHECinfra is releasing TICCS® 2020, following an industry-wide consultation between May and October 2019 that drew responses from 120 asset managers, asset owners, consultants and regulators. Some 70% of the respondents stated that TICCS® was clear and did not need changing. However, suggestions were also made to clarify definitions and new asset types have been added to the industrial activity pillar. In January 2020, the 16-strong independent TICCS® Review Committee conducted a detailed analysis of the consultation responses and provided its own recommendations for TICCS® 2020. Andrew Knight of RICS, the Chairman of the TICCS® Review Committee, said: “We had three main recommendations. First, the taxonomy should stay pure. There should be no hybrid categories, but companies could fall into multiple ones. It should also be as granular as possible to capture the heterogeneity of the asset class. Finally, TICCS® should be ‘normative’ and rest on first principles, but also stay open and keep evolving.” TICCS® 2020 adds ten …

2019Q4 Index Release (Erratum)

In the 2019Q4 Index Release made on January 16, 2020, it was mentioned that South East Water suffered a negative return in the 4th quarter of 2019 due to a “revision of its financial forecast.” This statement was not accurate on two counts: The forecast in question is produced by EDHECinfra’s cash flow models and analyses but was not produced or provided by South East Water. While our own analysis did lead to a revision of the financial forecast of this company in 2019Q1 (due to higher borrowing), we wish to amend the January 16 release to clarify that the main cause for the negative return in that quarter was not due to a drop in expected dividend between Q3 ands Q4 (which were unchanged), but to an increase in the term structure of the discount rates applied to this firm, itself the result of changes in long-term rates and risk premia. This rate change affected all water utilities in the UK negatively in the quarter, albeit differently depending on their individual cash flow forecasts and risk premia. While quarterly returns were negative on the 4th quarter, they were positive on the year for UK water utilities due to combination of healthy dividends, falling rates and despite a slight increase in risk premia during the first 3 quarters. South East Water and Affinity Water end up being the best performers for 2019 for the same reasons that they were amongst the …

2019Q4 Index Release: Up on the Year, Down on the Quarter

Unlisted infrastructure equity gave back some of the year’s gains in the final quarter of 2019 as rising bond yields curbed DCF valuations. Despite lower risk premia, performance was also tempered by flat average revenue growth. The EDHECinfra Global Unlisted Equity Index fell 2.58% to 5228 points by year end, though that still represents a year-on-year gain of 14.06%. The average global infrastructure equity premium is now slightly less than 5%, down from 5.5% two years ago and 8-9% before 2012. The 16-year duration of the index highlights the exposure of infrastructure companies to interest rate risk. After several quarters of declines, many markets saw long term rates heading upwards in Q4. Long-term UK yields climbed by some 40bp, 25bp in the US, more than 50bp in the Eurozone and 25-50bp in Australia. Broad Market Unlisted Infrastructure Equity Performance (local returns) Broad Market Unlisted Infrastructure Equity Index (2019Q4) The infrastructure sectors most exposed to interest rate risk are dominated by large, long-lived corporates (TICCS-GC2). New Zealand companies also struggled, representing six out of the bottom 10 performers. Some 10 out of the bottom 20 were regulated utilities and airports. Strong performers were supported by cash flow growth or their more robust, contracted business model (TICCS-BR1/CG1). For instance, the IH-635 Managed Lanes Project in the US showed both a steady increase in revenues, yielding Q4 returns of 1.4% (5.6% pa), reflecting the more robust performance of the contracted project segment of …

NATIXIS and EDHECinfra to research impact of ESG on infrastructure investing

Infrastructure benchmark pioneers create research chair to gauge how ESG factors are affecting infrastructure investments EDHECinfra, the same team that created an unlisted infrastructure indexing platform, launches its new three-year research project today. With the support of Natixis, the project’s aim is to create usable, comparable documented measures of the impact and risk profile of social and environmental factors on infrastructure investments. ESG – growing in importance, growing in impact ESG – environmental, social and governance – refers to the central factors in measuring the sustainability and ethical impact of an investment in a company or business. Despite its relevance to today’s financial world, few holistic and systematic measures exist to help investors to track ESG outcomes and related risks. Because these shortfalls act as a deterrent to investment, EDHECinfra is determined to tackle them. “Infrastructure investments have value because they are useful over long periods of time,” says Frederic Blanc-Brude, director of EDHECinfra. “Social and environmental factors significantly impact this long-term value, but today we do not know how or on what scale.” “We want to find out what the impact of better-designed, more resilient infrastructure can be for the economy and for investors, focusing on the first-order problems, like climate risk and social acceptability, over the life of these investments,” explains Anne-Christine Champion, Global Head of Real Assets at Natixis. “Together, we can build a new area of applied knowledge,” adds Blanc-Brude. “We will be putting together existing datasets …

International Construction Measurement Standards, 2nd edition is open

EDHECinfra partner RICS is launching the 2nd edition of its global consultation on International Construction Measurement Standards (ICMS).

An uncomfortable truth: infrastructure investors do not know their risks

We carried out the largest survey of infrastructure investors ever made. Here’s what we found: The largest survey of infrastructure investors ever undertaken shows that most investors cannot benchmark the risks they find themselves exposed to when investing in unlisted infrastructure. EDHECinfra releases a new survey sponsored by the Global Infrastructure Hub (GIH, a G20 Initiative). More than 300 respondents took part in the survey. They included representatives of 130 asset owners accounting for  more than 10% of global AUM or $10 trillion. This marks largest survey ever undertaken of asset owners and managers active in the infrastructure space and represents the views of large sophisticated investors. Some of the main findings include: Investors mostly use absolute return benchmarks (based on the risk-free or inflation rate), but less than 10% think they are good enough. Major concerns include: they are not representative, do not measure risk and do not allow asset-liability management. Currently, absolute return infrastructure equity benchmarks are not ambitious and not hard to beat. Most investors use a spread over real or nominal rate of 400-500bp. In a low rate environment, this falls short of annualised stock market returns. When investors use relative benchmarks, they use ‘fake benchmarks.’ Preferred relative benchmarks often include listed infrastructure indices, which have been shown to display 100% correlation with broad equity indices by academic research. Otherwise, investors use ‘industry peers’ as a relative benchmark, despite the well-known issues encountered with valuation and …

New research shows that infrastructure credit spreads are fair

A new paper drawn from the Natixis/EDHECinfra research chair sheds new light on the drivers of returns in private infrastructure debt. Infrastructure credit spreads remain twice as high today as in 2008, but this new research shows that only 30bps of this increase cannot be explained by changes in systematic risk factor prices.

No financial pain or gain for ESG management and reporting

New EDHECinfra research finds there is no financial penalty or gain (based on Return on Assets) for infrastructure firms to implement ESG management and reporting.A new paper drawn from the EDHECinfra/LTIIA Research Chair shows that Environmental, Social and Governance (ESG) scores are not negatively or positively correlated with the financial performance of unlisted infrastructure firms.

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