The largest survey of infrastructure investors ever made shows that most investors cannot benchmark the risks they are 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, including representatives of 130 asset owners accounting for USD10Tr in AUM i.e. more than 10% of global AUM. This is largest survey ever undertaken of asset owners and managers active in the infrastructure space and is representative of 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.
- Current 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 to 500 basis points. In a low rate environment, this is less than annualised stock market returns.
- When investors use relative benchmarks, they use ‘fake benchmarks.’ Preferred relative benchmarks are often listed infrastructure indices, which have been shown to have 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 return smoothing in private markets, as well as the difficulty to make direct comparisons.
- With current benchmarking practices, investors in unlisted infrastructure equity cannot understand their risk and define their infrastructure investment strategy. The practices described by investors correspond more to the definition of a hurdle rate than a benchmark. Current benchmarks cannot be used to identify systematic rewarded risks, monitor risk-adjusted performance or set risk budgets.
Frederic Blanc-Brude, co-author and director of EDHECinfra said: “The survey results clearly show that infrastructure investment practices have a long way to go to catch up with risk management practices in other asset classes. Infrastructure investment is still at the pre-historical stage, that is, before a written version of history. Other alternative asset classes went through a similar evolution from opaque and ill-defined to better understood thanks to new databases and benchmarks. This time is coming for infrastructure because investors recognise these problems as they become more acute.”
The paper can be downloaded here.