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.
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.
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.
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.
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).
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).