Towards Efficient Benchmarks for Infrastructure Equity Investments

Frédéric Blanc-Brude: This publication marks the launch of the Meridiam/Campbell Lutyens research chair on infrastructure equity investment management and benchmarking at EDHEC-Risk Institute.

Author(s):

Frederic Blanc-Brude

Research Director at EDHEC Risk Institute–Asia and Head of the Institute’s thematic research programme on infrastructure financing and investment.

Under the responsibility of Frédéric Blanc-Brude, Research Director at EDHEC Risk Institute—Asia, this chair examines the investment characteristics of infrastructure equity investment from the point of view of institutional investors. This research chair aims to bring clarity to institutional investors and regulators about the nature and investment profile of underlying infrastructure assets and of different types of investment funds using infrastructure as an underlying asset. In the context of the current shift towards alternative investment amongst institutional investors, this work will benefit the entire investment management community and help improve asset allocation and portfolio construction decisions. This research will follow three directions concurrently. First, by helping the investment management industry to better appreciate the financial economics and investment characteristics of underlying infrastructure investments, be they standalone projects or integrated utilities, we aim to contribute to improved investment vehicle design by intermediaries and to enhanced usage of infrastructure equity in long-term asset allocation decisions. Second, in the context of the regulatory changes affecting long-term investors, we aim to develop theoretical insights allowing for finer risk assessment and valuation of infrastructure equity. The objective is to assist institutional investors in the design, calibration and update of internal models that adequately account for the specificities of equity infrastructure investment when determining risk-based solvency and capital requirements. Finally, we aim to discuss the bases for a cash flow-reporting standard with the industry and engage in a wide-ranging effort to collect new data from investors in infrastructure equity, and work towards the development of meaningful and useful performance and risk benchmarks. This foundation paper starts from the empirical observation that infrastructure investing has not proven straightforward for institutional investors and that investment performance has so far seemed out of sync with their expectations. It makes two important contributions to the approach of infrastructure equity investment: firstly, using fundamental results and insights from economics and corporate finance, it shows that underlying infrastructure equity investments are not real assets as is sometimes argued, but financial assets representing rights to contractually determined cash flows. Secondly, it reviews the past decade of academic research on investment vehicles using infrastructure equity as an underlying and shows that the infrastructure equity beta has so far remained elusive and that passive investment solutions remain to be built. This research chair is dedicated to promoting research supporting such developments. We would like to express our gratitude to our partners at Meridiam and Campbell Lutyens for their support of this important research effort into improved understanding, standardisation and benchmarking of infrastructure equity investments.

Type: EDHEC Publication
Date: le 16/01/2013
Research Cluster : Finance

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