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.
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.
Benchmarking Long-Term Investment in Infrastructure...
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