In this issue of EDHECinfra Research Insights, we first discuss the surprising persistence of absolute return benchmarks in unlisted infrastructure investment. Today, absolute return benchmarks are the norm in the unlisted infrastructure investment sector, yet they are completely inadequate to understand the risk, performance and contribution of infrastructure assets to the total portfolio. The vast majority of investors agree with this assessment. We review what investors have to say about it, the reasons why these benchmarks are inadequate but also why they have tended to persist.
We establish that while long-only infrastructure investment cannot be considered an absolute return strategy (since it not market-neutral) the usual alternatives of using appraisals or listed proxies have been even worse options because they mis-represent the asset class. Absolute return benchmarks have persisted as the lesser evil.
However, recent innovations have increased the range of available choices to benchmark unlisted infrastructure. We show that that the Q1 2020 release of the EDHECinfra indices captured the impact of Covid-19 on infrastructure investment with a high degree of granularity; each sub-index capturing a different risk profile for different segments of the universe.
Leveraging this granularity, a complete analysis of the sources of risk and performance of any infrastructure portfolio can be conducted. In a second article, we use this data to better understand the performance of two peer groups of infrastructure investors: large asset managers and large asset owners.
We show that large infrastructure asset managers outperform the market and large asset owners thanks to the better asset selection skills. We also find they are not able to use asset allocation to different sectors or business risk segments to improve their performance. Instead, they often underperform the benchmark because of their implicit or de facto asset allocation choices.
Next, we summarise some of the findings of a new paper exploring whether infrastructure companies exhibit statistically significant differences from other investable assets. Controlling for variables like size, profitability, leverage, investment opportunities and industry, we show that they do indeed demonstrate unique fundamental characteristics including higher asset tangibility, asset illiquidity and inflexibility and lower operating leverage than a control sample of non-infrastructure firms.
A fourth article presents the first steps of our research program on the ESG characteristics of infrastructure companies: it highlights some of the key findings of a comprehensive review of ESG standards used in the infrastructure sector and argues that as the standardization of ESG follows its path towards consolidation, a scientific, theory-based approach to designing and implementing ESG assessments still remains to be built.
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?
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.