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.

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.

Anne-Christine Champion, Global Head of Real Assets at Natixis said: “These results show that infrastructure debt is fairly priced today because spreads are driven by systematic effects, representing the evolution of the preferences of market participants. This is important as infrastructure debt becomes more mainstream and measuring relative performance requires estimating fair value.”

The paper also shows that infrastructure debt pricing differs from corporate debt. While infrastructure spreads can be explained by a number of risk factors found across credit instruments, these factors impact infrastructure debt spreads differently. For example, larger corporate loans with longer maturities have higher spreads but the reverse is true of larger infrastructure project loans.

EDHECinfra director Frederic Blanc-Brude said, “We find that these effects change of over time. Some are impacted by the credit cycle, others by the business cycle. Important factors like the level of interest rates and geography have lost almost all power since quantitative easing policies started, other risk factors like size and duration are more persistent even with ultra-low interest rates.”

The paper uses a unique dataset of thousands of credit spreads and a multi-factor model to extract the systematic components of market prices from new instruments as they are originated. It then applies these systematic effects to a much larger, representative set of investible infrastructure debt, allowing unique insights into the private infrastructure debt market.

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.

This initial study – ESG Reporting and Financial Performance: the Case of Infrastructure – represents the first research insights into the link between returns and ESG in unlisted infrastructure.

The study cross-references two unique databases: the ESG scores computed by GRESB Infrastructure since 2016, and the financial metrics of the EDHECinfra universe. The paper shows that once the traditional factors that explain returns are taken into account, ESG ratings are not a significant driver of returns or profits.

Tim Whittaker, Research Director at EDHECinfra and co-author of the paper says, “This paper challenges the oft-reported notion that better ESG ratings should somehow systematically increase or decrease returns. ESG is not a risk factor in infrastructure investment.”

Silvia Garcia, Senior Analyst at EDHECinfra and co-author adds, “We do not find negative correlations between returns or profits and ESG ratings either, suggesting that implementing ESG does not harm financial performance.”

Thierry Déau, Chairman of LTIIA says, “Infrastructure investors increasingly identify ESG as a first order problem, beyond expected returns. Choosing better ESG is also a way to select better individual assets. In a world where diversification is limited, this remains highly relevant.”

The paper uses GRESB data for 173 firms reported between 2016 and 2018 and matched to the relevant financial performance data for firms present in the EDHECinfrauniverse of investible companies, which covers 25 major markets worldwide. It uses a series of statistical tests to try to detect relationships between GRESB Scores and returns or profits while controlling for other factors.

Rick Walters, Director of GRESB Infrastructure says, “This is the first generation of this research and it helps us refine our understanding of why ESG matters and how ESG data collection will continue to evolve to answer investors’ questions in the future. The ESG scores used in the study measure the management approach and transparency of performance reporting and highlight the need for more direct measures of such performance.”

Future research will aim to use longer time series, introduce additional measures of performance and utilise direct measures of ESG impact.

New EDHECinfra research documents the factors behind the evolution of unlisted infrastructure prices over past 15 years.

London – 30 January 2019 – A new paper drawn from the EDHECinfra /LTIIA Research Chair shows that common risk factors found in numerous asset classes explain the evolution of unlisted infrastructure secondary market prices. It also shows that after a long period of prices increases, “peak infra” may already be behind us.

Unlisted infrastructure prices have increased considerably over the past decade. Was it a bubble or a normal phenomenon? In a new ground-breaking paper, EDHECinfra shows that systematic risk factors can largely explain the evolution of average prices but also that valuations have shifted to a higher level.

Author and Director of EDHECinfra Frederic Blanc-Brude said: “The worries about a bubble were driven by the constant increase in prices since 2008. In fact, the process of price discovery happened in slow motion. Infrastructure businesses are expected to deliver steady and predictable cash flows and, to the extent that this is the case, they should be expensive. In a very illiquid market, it took 10 years for investors’ views on fair value to express themselves.”

Because private infrastructure is a very illiquid market and assets seldom trade, just looking at average reported prices is insufficient and biased. The paper uses actual transaction prices and advanced statistical techniques to estimate unbiased factor effects and apply these to a much larger group of companies (the EDHECinfra universe) which is built to be representative of the investable market.

Six factors are found to explain the market prices of unlisted infrastructure investments over the past 15 years; size, leverage, profits, term spread, value and growth. To these usual suspects, one can add sector and geographic effects. The result is an unbiased view of the evolution of prices (price-to-sales and price-to-earnings ratios).

Thierry Déau, Chairman of LTIIA said: “This new research shows that infrastructure valuations make sense today but also that focusing on systematic risks is an important aspect of value creation for investors in infrastructure. The existence of “value” effect for greenfield projects is good illustration of this fact.”

Blanc-Brude added: “Unlisted infrastructure prices should continue to be driven by common risk factors, some of which are relevant across asset classes. Unlisted infrastructure equity is actually found to be somewhat correlated with public equities, but also to have a different profile. Higher dividend pay-out ratios make future revenues more valuable today, while higher financial and operational leverage make future profits more uncertain.”

The paper concludes that average valuations have reached a plateau since 2016. Two of the main drivers of the slowdown of prices are the impact of the leverage factor and of interest rates on discount rates.

Download the full paper here.

 

Singapore, 10 April 2018 – A case study of 10 Spanish toll road projects shows that ill-designed procurement can lead to pro-cyclical infrastructure investment risk and significant losses for private investors.

EDHEC Infrastructure Institute – an academic research organisation building performance benchmarks for investors in private infrastructure – shed new light on the risks encountered in infrastructure project investment with new research examining the failed Spanish toll roads that the government just took over and intends to retender to private investors later this year.

The paper – Tome La Siguiente Salida (Take the Next Exit) – A Case Study of Road Investments Gone Wrong, Spain, 1998-2018 – is based on detailed financial data on each of the concession companies as well as in-depth interviews with individuals representing the public and private sector directly involved in the collapsed projects.

Despite the discipline of project financing and the presence of a blanket government guarantee in case of bankruptcy, equity investors were wiped out and their lenders booked losses of 90 cents on the dollar. How and why did these projects fail?

The detailed analysis of the events that led to the bankruptcy of all but one of the nine toll road concessions shows how case studies can be a valuable tool for understanding risk for investors.

Governments can procure privately financed infrastructure projects in ways that magnify moral hazard and create systematic risk for investors. In the case of the Spanish toll roads the simultaneous procurement of multiple large projects in a single national market, and extremely aggressive financial structuring meant the projects could not withstand the twin shocks of rising land expropriation costs and falling traffic volumes.

But nor should the Government have covered lenders’ losses despite the guarantee that covered events of bankruptcy. The authors use a series of models based on Game Theory (the theory of strategic bargaining) to show there was no incentive for the private sector to restructure the failing concessions and it becomes rational for the public sector to let the projects fail. There were no bad guys, just rational actors.

Silvia Garcia, a co-author of the study, and Senior Analyst at EDHECinfra, says: “Game theory can provide investors with a powerful set of tools to model and predict what is often labelled as ‘political risk’, and also holds lessons for the design of guarantees and the dynamics they create at the procurement stage.” Co-author and EDHECinfra director Frederic Blanc-Brude says: “Asset owners and managers are typically limited to making private infrastructure investments one deal at a time. Building a well-diversified portfolio, when it is possible, can take a decade. Thus, individual infrastructure investment case studies can usefully complement quantitative studies and improve investors’ knowledge and understanding of risk, including the nature and effect of political and regulatory shocks.”

Authors:
Silvia Garcia Moraleja, Senior Analyst, EDHEC Infrastructure Institute
Tim Whittaker, Associate Research Director, EDHEC Infrastructure Institute
Frédéric Blanc-Brude, Director, EDHEC Infrastructure Institute

Download the full research paper here.

 

Singapore, 30 January 2018 – Based on preferences expressed by major institutions in a new survey, EDHECinfra is releasing a taxonomy of global indices and sub-indices to structure the infrastructure asset class.

In its effort to create global benchmarks for infrastructure investors, the EDHEC Infrastructure Institute (EDHECinfra) recently surveyed asset owners and managers about how these indices should be structured to best address their asset allocation and performance monitoring needs.

In the largest survey of its kind over 200 major infrastructure investors, including asset owners representing more than 10% of global AUM in 2017 (US$10 trillion), revealed their preferences for the segmentation of unlisted infrastructure. This framework establishes an industry standard for unlisted infrastructure benchmarks.

Over half of respondents to the survey were focused solely on infrastructure equity investment, while a third seek both infrastructure equity and debt.

Investors mostly chose to reject the geographic and sectoral categories typically used for capital markets benchmarks, preferring instead to understand their infrastructure exposures in terms of the level of economic development and investability of national markets. They also recognised the fundamental difference between infrastructure project financing and infrastructure ‘corporates’.

Focusing on individual sectors was not considered a structuring aspect of the asset class, instead, most asset owners asked for ‘broad sector’ indices and sub-indices using `business model’ filters rather than industrial ones.

In response to these preferences, EDHECinfra reveals the industry standard for unlisted infrastructure benchmarks, outlining a taxonomy of indices and sub-indices that can create the most useful framework of reference for the asset class. Two universes (debt and equity) are split either between broad areas of economic development or by types of corporate structure, leading to eight broad market indices that will provide a global view of the infrastructure asset class.

This taxonomy also includes a limited number of sub-indices for the purpose of performance monitoring. These thematic sub-indices (by business risk, sector groups, credit risk) represent specific risk profiles to track the risk-adjusted performance of most specialised managers or dedicated accounts focused on a sub-segment of the infrastructure market.

Key findings:

• Almost 70% of respondents said economic development and infrastructure investability were the most relevant geographic segmentations for private infrastructure.
• 90% of respondents said it was relevant or highly relevant to segment infrastructure investments by business model (contracted, regulated, merchant).
• Investor’s views were relatively balanced on the segmentation of infrastructure by corporate structure. – 37% of respondents favour project finance specific benchmarks – 42% would rather use benchmarks with infrastructure projects and infrastructure corporates – 20% would prefer an infrastructure corporates only index
• Infrastructure debt investors were almost unanimous (95%) in the need to bucket infrastructure debt by credit risk and maturity, highlighting the need to integrate private infrastructure debt in broader fixed income strategies.

Notes to editors:

Survey details:

Selecting reference indices for the infrastructure asset class. A survey of Investor preferences and the EDHECinfra families of infrastructure indices.

Download the full research paper here.

Authors:

Noël Amenc, Professor of Finance and Associate Dean, EDHEC Business School

Frédéric Blanc-Brude, Director, EDHEC Infrastructure Institute

Singapore – 9 October 2017: In open letters to the chairman of the European Securities and Markets Authority (ESMA) and the chairman of the Securities and Exchange Commission (SEC) in the United States, EDHEC has called on regulators to take measures against the risks of investment in so-called `listed infrastructure’.

This call follows the publication by EDHEC of a position paper entitled “The rise of “fake infra”: The unregulated growth of listed infrastructure and the dangers it poses to the future of infrastructure investing.”The position paper documents the rise of the so-called listed infrastructure asset class, which EDHEC considers to be an ill-defined series of financial products. Initially targeting retail investors, and increasingly institutional investors, listed infrastructure now represents close to a third of the infrastructure investment sector.

“We strongly recommend stricter regulatory oversight of listed infrastructure products, including the obligation to include the word ‘listed’ in their name to avoid misleading investors,” says Frederic Blanc-Brude, Director of EDHECinfra, “as well as the obligation to include information in marketing documents warning investors that listed infrastructure may not deliver the same performance as unlisted infrastructure investments.”

The EDHEC paper finds that active listed infrastructure managers have invested in close to 1,900 unique stocks over the past decade, many of which cannot possibly be considered ‘infrastructure’ under any definition.

“We believe in the potential of infrastructure debt and equity investment for asset owners,” says Dr Blanc-Brude, “but today’s “fake infra” will disappoint. It is comparatively expensive and will leave investors without the promised low-risk, stable, inflation-linked returns. As a result, it could give infrastructure investing in general a bad name.”

“Serious research shows that listed infrastructure is failing to deliver on its many promises and, in our view, the number of false claims made about listed infrastructure products is high enough to consider a case of mis-selling,” adds Prof Noël Amenc, Associate Dean for Business Development at EDHEC. “Our and others’ research shows repeatedly that listed infrastructure, as it is proposed to investors today, exhibits high drawdown and volatility, does not have better risk-adjusted performance than broad stock market indices and can typically be explained away by a series of well-known factor-tilts available to investors throughout the stock market.”

The paper is available to download here.

The open letter to the ESMA chairman can be found here.

The open letter to the SEC chairman can be found here.