EDHECinfra Research Insights – June 2019

In this issue, our researchers look at the results of the 2019 EDHECinfra/G20 survey of infrastructure investors to show that investors do not understand the risks they are taking when investing in infrastructure, and they put forward a methodology that can address some of the most difficult issues with regard to the fair valuation of highly illiquid assets such as infrastructure equity and debt instruments.

Using data from the EDHECinfra/LTIIA Research Chair, our authors show that systematic risk factors can largely explain the evolution of average prices for unlisted infrastructure asset, and they examine the drivers and evolution of credit spreads in private infrastructure debt.

Our researchers try to determine if better ESG does improve infrastructure returns, as the environmental, social and governance aspects of infrastructure investments have been an increasingly important set of considerations for investors, and finally they ask the question, is infrastructure always an active strategy?

2019 Global Infrastructure Investor Survey – Benchmarking

The 2019 EDHECinfra / Global Infrastructure Hub survey of infrastructure investors focused on the role of benchmarks and revealed a number of key findings about the benchmarking practices in the unlisted-infrastructure-investment space for asset allocation, performance monitoring and risk management.

Although it is often neglected, the choice of benchmark is a foundational element in the investment process. First, it is an essential source of both the risk and the returns of a portfolio. Second, portfolio out-performance and its measurement also depends on the choice of benchmark. The use of inadequate bench- marks can lead to an incorrect evaluation of the manager’s performance.

Finally, in the case highly illiquid asset classes like infrastructure, managers and investment teams are given the dual objective of delivering a portfolio in line with the investment strategy (building it deal by deal, sometimes over a decade), and to outperform the average implementation of this strategy (deliver alpha). Representative benchmarks are thus absolutely necessary to determine managers’ success with respect to these two goals.

In effect, 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.

The results of this survey highlight the need to use better-defined benchmarks that measure risk and can help investors make better informed asset-allocation, monitoring and risk-management decisions.

The Pricing of Private Infrastructure Debt – a dynamic approach

This paper examines the drivers and evolution of credit spreads in private infrastructure debt. We ask two main questions:

Which factors explain private infrastructure credit spreads (and discount rates) and how do they evolve over time?
Are infrastructure project finance spreads and infrastructure corporate spreads driven by common factors?

We show that common risk factors partly explain both infrastructure and corporate debt spreads. However, the pricing of these factors differs, sometimes considerably, between the two types of private debt instruments.

We also find that private infrastructure debt has been `fairly’ priced even after the 2008 credit crisis. That is because spread levels are well-explained by the evolution of systematic risk factor premia and, taking these into account, current spreads are only about 29bps above their pre-2008 level. In other words, taking into account the level of risk (factor loadings) in the investible universe and the price of risk (risk factor premia) over the past 20 years, we only find a small increase in the average level of credit spreads, whereas absolute spread levels are twice as high today as they were before 2008.

EDHEC Research Insights

In new research from the EDHEC Infrastructure Institute (EDHECinfra), supported by the Long-Term Infrastructure Investors’ Association (LTIIA) as part of the EDHEC/LTIIA research chair on Infrastructure Equity Benchmarking, we show that systematic risk factors can largely explain the evolution of average prices but also that valuations have shifted to a higher level.

We show that unlisted infrastructure equity prices do not exist in a vacuum but are driven by factors that can be found across asset classes.

Additional research from EDHECinfra, supported by Natixis as part of the EDHEC/Natixis research chair on Infrastructure Debt Benchmarking, examines the drivers and evolution of credit spreads in private infrastructure debt. We show that common risk factors partly explain both infrastructure and corporate debt spreads.

However, the pricing of these factors differs, sometimes considerably, between the two types of private debt instruments.

ESG Reporting and Financial Performance: the Case of Infrastructure

This paper represents the first attempt at studying the relationship between the Economic, Social and Governance (ESG) and the financial characteristics of infrastructure companies.

The relationship between the impact of certain companies’ activities on their social and natural environment on the one hand, and their ability to deliver a certain level of financial performance on the other, is now a central question in the debate around responsible investment, especially when investors represent large constituencies of pension plan members, whether they belong to collective or individual schemes.

Unfortunately, such claims about the links between impact and returns in infrastructure are hard to substantiate. They are not verifiable, let alone falsifiable, in the current state of available data, because data on the actual impact of individual infrastructure companies on their immediate or distant social and environmental milieu simply does not exist today.

In this paper, as a first attempt to address this topic, we investigate the role of ESG reporting in relation to the financial performance of infrastructure companies. Indeed, data on ESG reporting is available and there is ground in the academic literature for arguing that the tendency to report ESG practices and the quality of this reporting are related to actual sustainable outcomes.

This paper is made possible by cross-referencing two unique databases covering the behaviour of infrastructure firms: the ESG scores computed by GRESB Infrastructure since 2016, and the financial metrics corresponding to the EDHECinfra universe.

Which Factors Explain Unlisted Infrastructure Asset Prices?

This 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.
Private infrastructure is an illiquid market and assets do not trade often. As a result, observable transaction prices are limited and are not representative of the investible market.
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).

Unlisted Infrastructure Asset Pricing Methodology – A modern approach to measuring fair value in illiquid assets

EDHECinfra produces calculated indices (as opposed to contributed indices), the computation of which requires estimating the value of individual constituents: unlisted infrastructure equity or debt investments qualifying under the TICCS taxonomy.

This document describes the approach taken to estimate the value, performance, and risk of each individual index constituent.

This approach aims to follow a number of recognisable guidelines on “fair value” accounting as defined under IFRS 13 and ASC topic 820 (US GAAP).

The Infrastructure Company Classification Standard

Private infrastructure investment is developing rapidly as a global asset class. This evolution requires a clear and robust classification of the individual infrastructure companies that equity investors can acquire or debt investors can lend to. The Infrastructure Company Classification Standard (TICCS) was created by EDHECinfra to provide investors with a frame of reference to approach the infrastructure asset class. It offers an alternative to investment categories that were inherited from the private-equity and real-estate universe (e.g., “Core” vs. “Core+”), which may not be the most informative when trying to group infrastructure investments and design strategies or simply to document the structure of the sector. TICCS is designed to be compatible with other standard investment-classification schemes, but it also uses fundamental insights from the academic literature to create a classification that embodies some of the key aspects of infrastructure businesses’ risk profiles.

Research for Institutional Money Management – Fall 2018

Investors hit a roadblock when investing in infrastructure. Until now none of the metrics needed by investors were documented in a robust manner, if at all, for privately held infrastructure equity or debt. This has left investors frustrated and wary. In a recent EDHECinfra/Global Infrastructure Hub Survey of major asset owners, more than half declared that they did not trust the valuations reported by infrastructure asset managers.
How, under such conditions, can the vast increases in long-term investment in infrastructure by institutional players take place? We need transparency and accurate performance measures.

This is the year of the Argentinian presidency of the G20 and it has been marked by a focus on infrastructure investment. With the support of the G20, the Singapore government, The Long-Term Infrastructure Investors Association, the Long-Term Investment Club and numerous private sector supporters, including Natixis, EDHECinfra has now built the largest database of infrastructure investment data in the world. With this we can now bring transparency and accurate performance measures to the infrastructure sector.

Using this data EDHECinfra has created performance benchmarks that are needed for asset allocation, prudential regulation and the design of infrastructure investment solutions. These first of a kind benchmarks provide investment metrics that are needed by investors; return, volatility, Sharpe ratio, duration, and maximum drawdown.
In 2019, this database will reach global coverage and a global index for private infrastructure debt and equity tracking 1000 firms can be published.

We started our journey to build benchmarks for infrastructure investors in Europe, the oldest and largest investible market for infrastructure in the world. We analysed the European market and selected the 14 major markets for infrastructure. We studied the size, age and evolution of the infrastructure industry in each of those countries, and painstakingly identified all investible infrastructure assets.

2018 EDHECinfra Research Insights

Contents:

1. Establishing an industry standard for the infrastructure asset class
2. A survey of investor preferences for the segmentation of private infrastructure
3. Infrastructure investment in emerging markets: Closing the “data gap”
4. The Rise of “Fake Infra”
5. Credit risk in private infrastructure debt
6. Investor Perceptions of Infrastructure: Willingness to Invest
7. Take the next exit: A case study of road investments gone wrong, Spain 1998-2018
8. Three routes to maximising infrastructure finance for development

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