The cost of international sanctions to investors in Russia’s airports

In this research note, we look at the potential loss of value of Russian airports due to the war in Ukraine. Drivers of impact include the closure of a number of national airspaces to Russian airlines as well as related sanctions that have been imposed since the start of the invasion. We find that the immediate impact on the cash flows of Russian airports so far remains very limited, and it is equity holders who will suffer most; the increase in the price of equity risk is many times more painful for investors marking to market. As a one-off immediate shock, the loss of value for investors exposed to Russian airports in March 2022 is estimated to be less than 5\%. However, we show that this cost will increase rapidly the longer the conflict and the sanctions continue. Domestic traffic will be quickly – and severely – reduced by Russian airlines’ inability to keep foreign-made planes flying and the compounded effect of higher discount rates will rapidly burn through the NAV of these assets.

Infrastructure Strategy 2022: A Pivot to the Digital Frontier

Massive infrastructure funding recently approved by the United States, China, and the EU, as well as ongoing improvements in low- and middle-income countries, are placing a renewed emphasis on infrastructure investments. Indeed, fund raising for public and private infrastructure investments—which include everything from power generation and renewable energy facilities to schools, hospitals, digital networks, water resources, and transportation projects¬—is hitting fresh highs: in 2022, global assets under management of private infrastructure investors are forecast to reach a record $950 billion.

While infrastructure investment opportunities are rife, returns from these projects vary. Some investment strategies are well suited for big gains in today’s environment; others are designed for smaller, albeit consistent, returns. Given the many possible investment strategies and the growing popularity of infrastructure investments as a whole, BCG and EDHECinfra, a provider of indexes and analytics for infrastructure investors, have partnered on “Infrastructure Strategy 2022,” the first in a series of annual reports intended to categorize the universe of investors by their priorities and focus as well as by their risk-adjusted performance.

The centerpiece of this report is the division of infrastructure investors into 16 peer groups that can be further broken down into four categories: global peer groups (which include asset owners, such as pension funds, endowments, and sovereign funds, and asset managers, such as private equity funds); home regions; asset manager styles; and asset owner styles.

Robust Benchmarks for investors in private infrastructure funds

The infraMetrics fund strategy analyser allows benchmarking the gross and net performance of unlisted infrastructure funds using robust IRR and multiple quartiles that are not biased or skewed by the limitation of manager contributed data. With this tool, thousands of observations of the typical performance of infrastructure funds in hundreds of segments, dozens of geographies and 20 years of vintages are available and updated quarterly with no lag. Simulated results are both congruent with contributed market data at the aggregate level over a long period, and more robust and precise at the vintage year or sub-segment level. With this tool, infrastructure manager selection and fund monitoring are not hindered by unreliable and biased reported fund performance data anymore.

EDHECinfra Research Insights – June 2021

Table of contents: The fair value of investments in unlisted infrastructure equity by Frédéric Blanc-Brude, Abhishek Gupta The volatility of unlisted infrastructure investments by Abhishek Gupta, Frédéric Blanc-Brude, Luna Lu, Amanda Wee The next generation of data for infrastructure investors …

The Volatility of Unlisted Infrastructure Investments

The volatility of infrastructure equity investments is the risk which investors take to receive a reward for holding such assets. Therefore, a robust measure of risk and its drivers is an essential part of the inclusion of infrastructure investments in the portfolio, from strategic asset allocation to risk management and reporting, to manager compensation. However, measuring this risk is difficult because the only available data is often limited and typically report unrealistic total return volatility. In this paper, sponsored by the Long-Term Infrastructure Investor Association (LTIIA), we examine the drivers of the volatility of unlisted infrastructure equity investments, that is also, the reasons why the market prices of such investment can and do vary over time.

The market value of these investments is determined by the combination of expected cash flows (dividends), and a discount rate that combines a term structure of interest rates (the value of time) and a risk premia to compensate investors for the uncertainty of the future payouts. On average, the applicable market discount rate is also a reflection of investors’ expected return.

Using our approach to mark unlisted infrastructure to market, we find that the combination of changes in expected dividends (e.g. following a change in demand for transport services or energy) and of changes in expected returns lead to a level of total return volatility in the 7-12% range. The resulting risk-adjusted returns are realistic while still attractive.

Our analysis uses the EDHECinfra database of unlisted infrastructure equity investment data, which covers hundreds of companies over 20 years and a new robust approach to measure the market value of these investments over time. Thanks to this technology, which predicts actual market prices very precisely, it is possible to measure the variability of unlisted infrastructure equity prices and to describe its fundamental components.

In the paper, we conclude that with adequate and reliable measures of volatility, infrastructure can be addressed from a total portfolio perspective (strategic allocation), from a prudential perspective (e.g. Solvency-II) using methods that apply across asset classes.

The Fair Value of Investments in Unlisted Infrastructure equity

The robustness of better data & advanced methods

As more investors consider allocations to unlisted infrastructure, the need to bring the asset class into the mainstream of risk management, asset allocation and prudential regulation is increasing rapidly. New prudential rules, the Covid-19 pandemic and the increasing visibility of infrastructure in individual retirement products have made the frequent reporting of fair infrastructure valuations all the more urgent.

Measuring the fair market value and therefore the risks of unlisted infrastructure is made more difficult by the paucity of data, Appraisal values are typically stale and do not reflect the market conditions including the latest price of risk applicable to private infrastructure. In the absence of comparable transactions, most unlisted infrastructure investments have effectively been booked at or near their historical cost.

Thanks to recent advances in data collection and asset pricing techniques, it is now possible to estimate the evolution of fair market prices for unlisted infrastructure equity investments. In this note, we report that:

1. Common risk factors explain observable market valuations of unlisted infrastructure companies.
2. The risk premia of these factors can be measured on an ongoing basis, as new transactions table place. Thanks to these risk premia, individual assets that do not trade but are exposed to the same factors can also be priced.
3. This approach predicts transactions prices accurately within 5% of observed transaction prices and produces robust series of returns with no smoothing.

This technology allows measuring the true yield of infrastructure investments, their optimal contribution to multi-asset portfolios, duration and much more.

The choice of performance test benchmark of Superannuation funds’ investments in infrastructure

Submission to the Australian Treasury
SUPPORTING RESEARCH PAPER

In this contribution to the exposure draft consultation on the “Your Future, Your Super” package, we do not comment on the general approach taken by the regulator to benchmark MySuper products but solely focus on the choice of benchmark for the unlisted infrastructure asset class. We propose abandoning the use of listed equity indices to proxy investments made in the unlisted infrastructure equity asset class in the proposed performance tests of MySuper products. We argue that recent advances in data collection and innovation in asset pricing provide a robust and academically validated alternative to the currently proposed benchmark. This listed equity index (the FTSE Developed Core Index) is wholly inadequate because it is not representative of the universe or of the risks to which Superannuation products are exposed when investing in unlisted infrastructure. Instead, the infra300, an index built to be representative of the unlisted infrastructure universe, constitutes a robust and fair alternative that can benefit plan members and managers alike as well as meeting the prudential objectives of the regulator.

Towards a Scientific Approach to ESG for Infrastructure Investors

This paper explores the role of environmental, social and governance (ESG) issues in an investment context, namely how institutional investors should incorporate ESG elements into the financial management of their portfolios. A growing number of investors are pursuing ESG objectives to directly improve environmental and social outcomes, either to satisfy mandates from their members or to conform to the expectations of society. This is increasingly the case even though these organisations have primarily been created to deliver investment outcomes, in particular retirement income. Consequently, investors may wish to exclude certain types of assets from their universe such as coal-fired power plants or projects mired in social controversy. However, regardless of motivation, ESG-related decision making will have a financial impact on portfolio performance. It is this area that we investigate here – the role of ESG within an infrastructure portfolio from a strictly financial standpoint.

Strategic Asset Allocation with Unlisted Infrastructure

In this paper, we show how the traditional indexes used as proxies for unlisted infrastructure fail to represent the qualities of the asset class. Listed infrastructure indices are highly correlated with the wider equity universe – if the asset class behaved in this way, there would be little point in investors buying it as it would not add much in terms of diversification or improving the risk-return profile of the portfolio. Appraisal-based indices are correlated with nothing at all, making them singularly useless for the task in hand – their construction gives results that are so “smooth” that volatility is very low and correlations close to zero, which would signal unrealistically high risk-return rewards that are simply unfeasible in the real world. EDHECinfra’s indices of unlisted infrastructure, on the other hand, such as the infra300®, represent the characteristics of this asset class well, making them the best available proxy for investors to use.

We also show how investors can carry out a simple asset allocation exercise to calculate the optimal allocation they should be making to unlisted infrastructure based on their individual portfolio needs. Using different optimisation techniques and parameters, and considering different investor profiles, our research signals consistent allocations to infrastructure in the region of 10%, many times current levels. Our indices also offer a granularity that can help portfolio design in a way that broader and less well-defined proxies are unlikely to achieve for those seeking to optimise risk-adjusted returns.

Unlisted Infrastructure Performance Contribution, Attribution & Benchmarking

In this case study, we use the EDHECinfra index data to better understand the performance of two peer groups of infrastructure investors: large asset managers and large asset owners.

Leveraging the granularity of the families of EDHECinfra indices and the TICCS® taxonomy of infrastructure investments, a complete analysis of the sources of risk and performance of any infrastructure portfolio can be conducted.

This case study documents how two peer groups of infrastructure investors perform relative to the market, and to each other and why they perform the way they do.

infraMetrics™ by EDHECinfra

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