Research for Institutional Money Management

We conducted one of the largest survey ever made of infrastructure asset owners and managers in 2019 and found that most investors use absolute benchmarks or listed infrastructure indices to determine their investment strategy, monitor performance and manage risk.

The vast majority of respondents also acknowledge major issues with their infrastructure benchmarking practices: current benchmarks are not representative, do not measure risk, do not allow investor to target or define a strategy and do not offer much information about correlations with other asset classes.

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.

This situation will evolve and, in all likelihood, improve with the development of the asset class. One could make comparisons with the development and gradual improvements made in other alternative asset classes that began to attract institutional investors a couple of decades ago such as real estate or hedge funds.

Long-term investment in illiquid assets creates a demand for monitoring (as the alternative to trading in and out of the asset class) and as better databases and benchmark offerings are created, growing and successful alternative asset classes like infrastructure begin to the long road towards maturity, transparency and better benchmarks.

EDHEC Research Insights – Infra Special

The next generation of EDHECinfra indices is ready. They are computed quarterly, use meticulously curated private data for hundreds of companies in the 25 most active markets in the world, and cutting-edge fair value asset pricing methods. A key element in this project was the definition of the universe. Infrastructure may not be easily defined but infrastructure investment has to be.

When we started working on this topic at EDHEC we decided to focus more on what “infrastructure investment is like” i.e. what drives risk and less on what “infrastructure does” (move people or electricity from A to B, etc). This is because at the heart of any financial investment decision lies the trade- off between risk and future value.

Even in highly illiquid, opaque private markets, as we show in a series of new papers the systematic factors driving prices in unlisted infrastructure debt and equity, investors make choices that reflect perceived risks and price these risks accordingly.

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.

Do NOT follow this link or you will be banned from the site!

DISCLAIMER

  • The information contained on the EDHECinfra website (the “information”) has been prepared by EDHECinfra solely for informational purposes, is not a recommendation to participate in any particular investment strategy and should not be considered as an investment advice or an offer to sell or buy certain securities.

    All information provided by EDHECinfra is impersonal and not tailored to the needs of any person, entity or group of persons. The information shall not be used for any unlawful or unauthorised purposes. The information is provided on an “as is” basis.

    Although EDHECinfra shall obtain information from sources which EDHECinfra considers to be reliable, neither EDHECinfra nor its information providers involved in, or related to, compiling, computing or creating the information (collectively, the “EDHECinfra Parties”) guarantees the accuracy and/or the completeness of any of this information.

    None of the EDHECinfra Parties makes any representation or warranty, express or implied, as to the results to be obtained by any person or entity from any use of this information, and the user of this information assumes the entire risk of any use made of this information. None of the EDHECinfra Parties makes any express or implied warranties, and the EDHECinfra Parties hereby expressly disclaim all implied warranties (including, without limitation, any implied warranties of accuracy, completeness, timeliness, sequence, currentness, merchantability, quality or fitness for a particular purpose) with respect to any of this information.

    Without limiting any of the foregoing, in no event shall any of the EDHECinfra Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits), even if notified of the possibility of such damages.

    All EDHECinfra Indices and data are the exclusive property of EDHECinfra. Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results. In many cases, hypothetical, back-tested results were achieved by means of the retroactive application of a simulation model and, as such, the corresponding results have inherent limitations.

    The Index returns shown do not represent the results of actual trading of investable assets/securities. EDHECinfra maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. Back-tested performance may not reflect the impact that any material market or economic factors might have had on the advisor’s management of actual client assets.

    The information may be used to create works such as charts and reports. Limited extracts of information and/or data derived from the information may be distributed or redistributed provided this is done infrequently in a non-systematic manner. The information may be used within the framework of investment activities provided that it is not done in connection with the marketing or promotion of any financial instrument or investment product that makes any explicit reference to the trademarks licensed to EDHECinfra (EDHECinfra, Scientific Infra and any other trademarks licensed to EDHEC Group) and that is based on, or seeks to match, the performance of the whole, or any part, of a EDHECinfra index. Such use requires that the Subscriber first enters into a separate license agreement with EDHECinfra. The Information may not be used to verify or correct other data or information from other sources.

    The terms contained in this Disclaimer are in addition to the Terms of Service for users without a subscription applicable to the EDHECinfra website, which are incorporated herein by reference.

    This site uses cookies to deliver the services you request, improve user experience and measure audience. By continuing to browse our website, you are consenting to our use of cookies. Find out more about this in our Privacy policy.

  • X
    X