Benchmarking Long-Term Investment in Infrastructure

Frédéric Blanc-Brude: This paper discusses the need and propose an approach to benchmark long-term investments in infrastructure, where long-term investment simply refers to any unlisted and illiquid asset.

Author(s):

Frederic Blanc-Brude

Research Director, EDHEC Risk Institute-Asia

In this position paper, EDHEC-Risk Institute argues that benchmarking long-term infrastructure investments has become a sine qua non to match the supply and demand of long-term capital, improve asset allocation outcomes for investors, adapt prudential regulation and support economic development. It then details a roadmap towards infrastructure investment benchmarks and presents recent advances. Matching the huge demand for capital investment in infrastructure projects around the world with the available supply of long-term funds by institutional investors has never been so high on the international policy agenda. For asset allocation to long-term investments in infrastructure to grow in a sustainable manner, investors need reliable information on the performance to be expected from such investments over time and in different economic environments, and regulators need to understand the risks investors are taking to correctly calibrate their prudential frameworks. Hence, substantial investment in infrastructure by long-term investors will not be possible without adequate measures of expected performance and risk, i.e. benchmarks, whose development is particularly challenging in the context of infrastructure investments marked by the heterogeneous and lumpy nature of the underlying assets and the private, illiquid and thinly-traded nature of the markets in which financial claims to the revenues produced by these assets are originated and exchanged. The nature of long-term investment in infrastructure is such that extensive data collection, while absolutely necessary, will not be sufficient and must be combined with advanced asset pricing and risk measurement tools. Against this backdrop, EDHEC-Risk Institute has put forward a roadmap detailing eight key steps to create long-term infrastructure investment benchmarks. At the level of individual infrastructure equity or debt instruments, we argue for focusing on defining underlying financial assets, using adequate pricing models for thinly traded instruments, defining data collection needs and standardising performance reporting to create a global database of infrastructure cash flows. At the portfolio level, while a basket of long-term and illiquid infrastructure project debt or equity is not easily or instantly investable, it is possible to design and estimate the performance characteristics of constructs that have typical exposures to well-documented infrastructure risks such as greenfield or brownfield risks, merchant or contracted revenue risks, etc. that can be used independently or combined to guide different investment strategies and create useful benchmarks for asset allocation, investment manager evaluation and more precise measures of the risk-weights required by prudential regulation. Along with further research advances, this initiative requires the support and involvement of policy makers, regulators, banks and infrastructure investors to make possible the creation of an infrastructure asset class that has become ubiquitous in the public debate but remains mostly un-charted for investors and regulators owing to the absence of benchmarks.
Pdf
Benchmarking Long-Term Investment in Infrastructure...
(-1.00 B)
Type: Position paper
Date: le 11/06/2014
Extra information : For more information, please contact EDHEC Research and Development Department [ research@drd.edhec.edu ]
Research Cluster : Finance

See Also

Immersion at Station F for start-up challenge finalists !
News
- 13-10-2021
Devised for students with start-up projects on the Pre-Master and Master 1 years of the...
Financing your MBA - are you eligible for a scholarship?
News
- 12-10-2021
How to finance your Global MBA abroad is a critical question you need to think about...
Apprenticeship program: a perfect combination of academic knowledge and professional experience
News
- 12-10-2021
Yiqing Ma joined EDHEC Apprenticeship Track in 2019. She shares insights into the...
CRÉDIT AGRICOLE NORD DE FRANCE, AMUNDI AND CRÉDIT AGRICOLE CIB, PARTNERS OF EDHEC BUSINESS SCHOOL’S MSC IN CLIMATE CHANGE & SUSTAINABLE FINANCE
News
- 08-10-2021
Three major players in the Crédit Agricole Group operating in the banking and finance...