Written on 02 April 2015.
EDHEC-Risk Institute review existing approaches developed to value private equity investments and conclude that they are inadequate for the purpose of valuing unlisted infrastructure project equity. Such methods either require observing more data than is possible for long-term infrastructure projects, or consists of internal rate of return (IRR) computation that fail to answer investors and regulators questions about expected risk-adjusted performance.
The proposed approach - which combines modelling future dividends using Bayesian inference with extracting the term structured of expected returns implied by observable transaction prices - is readily applicable and allows computing the realised and forward-looking metrics required to approach infrastructure equity investment from both asset allocation and prudential perspectives.
According to Thierry Déau, CEO of Meridiam, “We are delighted that our sponsorship of the research chair at EDHEC-Risk Institute is producing such pioneering and valuable research. As a founding member of the Long Term Infrastructure Investors Association (LTIIA) we have often said that without a benchmark, privately-held infrastructure cannot be considered as an asset class in its own right. This work of EDHEC-Risk Institute is clearly an essential step to define an academically validated valuation methodology that could benefit the community as a whole and improve transparency of any future benchmarks. We believe it will provide a firm platform for decades of sound infrastructure investment that will benefit communities globally.”
A copy of “The Valuation of Privately-Held Infrastructure Equity Investments” can be downloaded via the following link:
This research was supported by Meridiam and Campbell Lutyens as part of the research chair at EDHEC-Risk Institute on “Infrastructure Equity Investment Management and Benchmarking.”