Research for Institutional Money Management: Infrastructure Benchmarking

Contents:
– Access to Infrastructure Investment and #fakeInfra
– Is Listed Infrastructure an Asset Class?
– Private Infrastructure Equity Investment Benchmarks
– Private Infrastructure Debt Benchmarks
– The Valuation of Private Assets
– How to Derive Equity and Debt Index Results

This issue is an Infrastructure Benchmarking Special.

We first address the rise of #fakeInfra and how it has been an obstacle to the development of real infrastructure investment. There is no such thing as a “listed infrastructure asset class.” It is presented to investors as an opportunity to gain exposure to something new or rare, but has really always been available — that is, it is already “spanned” by existing capital market and other instruments.

2017 EDHECinfra Research Insights

Contents:
– Towards better infrastructure investment products?
– Looking for a listed infrastructure asset class
– Is private infrastructure different?
– Tracking credit metrics in private infrastructure debt
– Data collection for infrastructure investment benchmarking

In this Special Issue of EDHECinfra Research Insights We present the result of the first in-depth survey of institutional investors’ perceptions and expectations of infrastructure investment. Almost two thirds of surveyed institutions declared that they wanted to increase their current holdings of infrastructure investments.

The survey reveals some important evolutions and also important differences of perspectives, amongst investors and also between asset owners and managers. One of the key findings is that investors have no bench- marks and do not trust reported valuations.In a short article, we then look at whether an asset class of listed infrastructure exists. We do not manage to find listed proxies for infrastructure assets. We conclude that what is typically referred to as listed infrastructure is not an asset class or a unique combination of market factors. It cannot be persistently distinguished from existing exposures in investors’ portfolios. Expecting the emergence of a new or unique “infrastructure asset class” by focusing on public equities selected on the basis of industrial sectors is unlikely to be very useful for investors.

Is “Listed Infrastructure” a fake asset class? An Asset Pricing Approach

This study extends the literature by taking an asset pricing approach to examine whether infrastructure is indeed an asset class or otherwise. The question posed in this study has important implications in portfolio management and to long-term investors (such as pension and superannuation funds).

If infrastructure assets offer superior risk-adjusted returns over and above other asset classes (such as stocks, bonds, real estate, cash) then these investments will become the dominant asset class going forward. Conversely, if infrastructure assets do not exhibit return, risk and correlation characteristics which are not distinguishable from other asset classes then it can be argued that they may be classified as investment substitutes for current investments and they cannot be deemed as an asset class.

Our study presents evidence that global and regional publicly listed infrastructure index returns cannot be considered as a separate asset class. Our results suggest that listed infrastructure does not exhibit sufficient differences in their return, risk and correlations to warrant the classifications a separate asset class.

Towards better infrastructure investment products?

In this paper sponsored by the Global Infrastructure Hub (a G20 Initiative) EDHECinfra presents the result of the first in-depth survey of institutional investors’ perceptions and expectations of infrastructure investment, and asks what next generation of investment products can better answer the needs of long-term investors in infrastructure.

Research for Institutional Money Management: Infrastructure Investing

This special issue of the June 2015 Pensions & Investment EDHEC-Risk Supplement includes a special focus on infrastructure investment research.

Our first article argues that a number of characteristics associated with the structuring of capital projects constitute a much more powerful framework to understand, benchmark and predict long-term returns in infrastructure debt or equity. Thus, infra- structure investment can be construed as a way to buy claims on future cash flows created by long-term contractual arrangements between parties. In numerous cases, infrastructure investors do not actually own any steel or concrete. When they do, the value of their investment is conditioned not by the tangible nature of the asset, but in a license to operate a natural but regulated monopoly.

In the area of infrastructure investment, having progressed towards clear definitions of underlying assets, and built robust, state-of-the-art pricing and risk models that avoid the pitfalls of existing practices and are designed to deliver the answers needed by investors, regulators and policy-makers, it is now time to collect the relevant information. Collecting this information requires large-scale cooperation between investors, creditors, academic researchers and the regulators that can help make such reporting part of a new standard approach to long-term investment in infrastructure by institutional players.

We discuss a dedicated valuation framework for privately-held infrastructure equity investments. Following the roadmap to create long-term infrastructure investment benchmarks that we had previously developed, this framework takes into account the challenges of valuing privately-held and seldom-traded infrastructure equity investments, while aiming to design a methodology that can be readily applied given the current state of empirical knowledge and, going forward, at a minimum cost in terms of data collection.

2015 EDHEC-Risk Research Insights

This special issue of IP&E summarises some of the key new research presented at EDHEC-Risk Day Europe 2015.
 
Estimating the performance of infrastructure debt instruments has also become a recurring question for both long-term investors and prudential regulators. In a new paper, we propose the first robust valuation, risk measurement and data collection framework for private infrastructure project loans.

Next, we propose the first valuation framework dedicated to privately-held infrastructure equity investments. Following the roadmap to create long-term infrastructure investment benchmarks described in Blanc-Brude (2014), we develop a framework that takes into a account the challenges of valuing privately-held and seldom traded infrastructure equity investments, with the aim of designing a methodology that can be readily applied given the current state of empirical knowledge and, going forward, at a minimum cost in terms of data collection.

The valuation of privately-held infrastructure equity investments

This paper contributes a rigorous valuation framework to the debate on the benchmarking of privately-held infrastructure equity investments. We aim to achieve the following objectives:

1. Determine the most appropriate valuation framework for privately-held equity investments in infrastructure projects or entities;
2. Design a methodology that can be readily applied given the current state of empirical knowledge and, going forward, at a minimum cost in terms of data collection;
3. Derive some of the most relevant valuation and performance measures for long-term equity investors and regulators;
4. Define a parsimonious data collection template that nevertheless allows meeting the three points above.

Part of the EDHEC/Meridiam/Campbell Lutyens/ Research Chair 2013-2016

Unlisted Infrastructure Debt Valuation & Performance

This paper is part of an ongoing research project aiming to create long-term investment benchmarks for investors in infrastructure. It is the first valuation and risk measurement model created specifically for unlisted infrastructure debt instruments. It provides a framework to value and assess the return and risk characteristics of individual project finance loans.

Part of the EDHEC/Natixis Research Chair 2012-2015

Measuring risk in unlisted infrastructure equity investment

In this paper, EDHECinfra proposes a methodology to measure the risk of unlisted infrastructure equity investments at the underlying level. This methodology relies on theoretical insights but is also designed to use standardised cash flow data, which either already is or could be collected in a systematic manner by investors in infrastructure equity and their managers.

Who is afraid of Construction Risk? Portfolio Construction with Infrastructure Debt

This paper is the first of series discussing the opportunity for long-term institutional investors such as pension funds, insurance companies or sovereign wealth funds, to invest in large portfolios of infrastructure debt, both to manage their liabilities and to minimise their exposure to capital market volatility. Our analysis focuses on project finance debt since it represents the bulk of existing and, in all likelihood, future infrastructure debt.

In what follows, we review existing academic research on infrastructure project finance and propose a theoretical and empirical analysis of the role of credit risk in infrastructure debt from a portfolio standpoint, on a held-to-maturity basis.