Building benchmarks for infrastructure investors: a long but worthwhile journey

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Building benchmarks for infrastructure investors: a long but worthwhile journey

3 minutes
January 1, 2018 3:54 pm

This blog was originally published on the World Bank’s PPP Blog Website.

It’s past time for proper infrastructure benchmarks

The Argentinian presidency of the G20 opens this month. All the signs indicate that it will be marked by a focus on infrastructure investment. Already, the G20 and OECD have announced a wide-scale data collection initiative for the purpose of creating benchmarks for the risk-adjusted financial performance of private infrastructure debt and equity investments.

It is about time.

Investors hit a roadblock when investing in infrastructure. Until now, none of the metrics needed by investors were documented in a robust manner, if at all, for privately held infrastructure equity or debt. This has left investors frustrated and wary. In a 2016 EDHECinfra/Global Infrastructure Hub Survey of major asset owners, more than half declared that they did not trust the valuations reported by infrastructure asset managers. How, under such conditions, can the vast increases in long-term investment in infrastructure by institutional players envisaged by the G20 take place?

Above all, we need transparency and accurate performance measures and the G20 data collection initiative can have a catalytic effect.

We have been working hard to plug the gap

With the support of the G20, the Singapore government, The Long-Term Infrastructure Investors Association, the Long-Term Investment Club and numerous private sector supporters, the EDHEC Infrastructure Institute (EDHECinfra) has now built the largest database of infrastructure investment data in the world. Using this data, we can create the performance benchmarks needed for asset allocation, prudential regulation and the design of infrastructure investment solutions. These mark the first of a new generation of benchmarks, ones that provide the investment metrics needed by investors; return, volatility, Sharpe ratio, duration, and maximum drawdown.

In 2019, this database will reach global coverage. We will publish our global index for private infrastructure debt and equity tracking 1000 firms.

It’s been a tough journey

We started our journey to build benchmarks for infrastructure investors in Europe, the oldest and largest investible market for infrastructure in the world. Firstly, we analysed the European market and selected the 14 major markets for infrastructure. Then we studied the size, age and evolution of the infrastructure industry in each of those countries. Finally, we painstakingly identified all investible infrastructure assets.

Next, we selected a list of 400 firms representing the European infrastructure market by sector, business model or country. We achieved coverage for 50% of the market by size in each year, ensuring a representative sample through time. This became the constituent list for the benchmarks. For each firm we collected data for realised and forecast cash flow to debt and equity holders. We categorised firms as an infrastructure project or infrastructure corporate, and then classed them by business model – contracted, merchant and regulated.

We undertook this project in coordination and collaboration with the industry. Banks, asset owners and managers all helped in providing us with the essential data. This collaboration gives a clear sign that the private infrastructure industry is growing towards a more mature and transparent stage. The support of private investors and lenders to this initiative highlights an impressive spirit of cooperation and deserves praise.

We needed to start with new data and reporting standards

In this context, EDHECinfra has also developed data collection and reporting standards that make data collection more efficient and reporting more transparent. This methodology provides a framework for data collection for the long-term financing of infrastructure.

Today, the first generation of benchmarks give us estimates of financial performance and risks of reference portfolios of privately held infrastructure investments. This will help answer asset allocation, prudential and performance monitoring questions. It will also improve transparency and efficiency of investment in infrastructure around the world.

There’s still a long way to go, but we are getting there

Without doubt, much work remains to be done on this road less travelled. However, thanks to the strong support of the G20 for better documenting the performance of infrastructure investments, we expect this momentum to continue. As more infrastructure investors pool their data we can improve our common understanding of the infrastructure investment sector. Hence better benchmarking results and better investment solutions in infrastructure can be designed.