A G20 Reference: EDHECinfra helps to fill the data gap

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A G20 Reference: EDHECinfra helps to fill the data gap

3 minutes
December 9, 2020 6:49 pm

EDHECinfra help fill the data gap and is now included in the GIH Infra Monitor 2020.

Several years ago, the G20 identified the lack of adequate data on the financial performance of infrastructure investments, the majority of which is unlisted, as an important hurdle for the development of a full-fledged infrastructure asset class. The adequate understanding and benchmarking of infrastructure investments was identified as a major impediment to channeling long-term savings into investments that could support future economic growth, the transition to a low-carbon economy, as well as the billions-to-trillions agenda of development finance institutions.

In 2019 the EDHEC Infrastructure Institute launched a platform giving access to investors, regulators and policy makers to key indices and hundreds of sub-indices and analytics about the risk and performance of unlisted infrastructure equity and debt.

Several years in the making, created with the support of the public (Monetary Authority of Singapore, GIH) as well as the private sectors (Natixis, Meridiam, Campbell Lutyens), these indices are now part of the asset allocation and performance monitoring work of dozens of asset owners and managers, several prudential and economic regulators, and one of the inputs to the GIH Infrastructure Monitor.

The success and robustness of these indices rest on two key methodological choices.

First, these indices are built on a clear and objective definition of the infrastructure universe thanks to TICCS® (the infrastructure company classification standard). Unlisted infrastructure investment strategies were long presented as a choice between Core and Core+ and other variants of a terminology inherited from private real estate, that is ill-defined, opaque and prevents benchmarking. TICCS is built on the objective, observable and standard characteristics of infrastructure businesses, while being much more granular that industrial classifications used for stocks like GICS®. Thanks to TICCS, like-for-like comparisons can be made across segments of the infrastructure asset class.

This allows policy, regulation and investment choices to be understood on a relative basis. For instance, our data shows that the Asia Pacific region outperforms the rest of the world mostly because of the greater share of merchant (TICCS pillar 1) power (TICCS pillar 2) project finance (TICCS Pillar 4) equity investments in this part of the world. Every two years, TICCS is market-tested and reviewed by an independent committee that includes some of the largest investors in the world as well as other standard setters, including the Royal Institute of Chartered Surveyors (RICS) which chairs the Review Committee.

The second methodological choice at heart of the EDHECinfra indices is the measurement of each constituent’s fair value at the end of the quarter, using on a risk premium calibrated on the basis of the latest secondary market transactions, the latest interest rate curves, and cash flow forecasts reflecting the latest firm-level and sector-level data.

The choice of marking these assets to market and not to hold them at some historical or book value is fundamental to objective of benchmarking the infrastructure asset class. Appraisals tend to be ‘stale’ when it comes to market values because discount rates are not revised to reflect the evolution of the price of risk or of base interest rates (the time-cost of money). As a result, time series of private net asset values reported to investors exhibit no correlation with financial market and way too little volatility to be realistic.

Without a mark-to-market assessment of the performance of infrastructure investments, there is no infrastructure asset class to speak of. Investors cannot understand the role of infrastructure in their portfolio, regulators cannot gauge the risks of these investments and policy makers do not know what the cost of capital required by the private sector to invest in infrastructure is. In turn, this makes the economic regulation of infrastructure tariffs contentious and driven by the bargaining power of the parties rather than objective data.

The choices made to develop the EDHECinfra indices allowed the understanding of the impact of Covid-19 on the infrastructure asset class possible almost in real time. Each quarter, thanks to the breadth and depth of the data collected by EDHECinfra (650+ firms making a representative set of an investible universe of 5,500 infrastructure companies in 25 countries), it was possible to assess the impact of the lockdowns and subsequent recession on cash flows, measure the impact on the unlisted infrastructure risk premia, take into account the evolution of interest rates given the different public policy responses to the pandemic crisis. Moreover, it is possible to describe the impact of each component on fair valuations independently of each other, thus documenting the role of markets, central bank policy and the lockdowns.

The use of accurate data that captures the evolution and the drivers of the performance of infrastructure assets is more and more widespread amongst investors and regulators and is driving a fundamental evolution of the infrastructure investment sector towards better regulation, better risk management and better outcomes for investors.

Covid-19 reminded us that infrastructure investments are risky. EDHECinfra has created a set of tools and data that reveal how much this is the case and what can be done about it.