Building benchmarks for infrastructure investors: a long but worthwhile journey

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Photo: User 377053 | Pixabay

The Argentinian presidency of the G20 opens this month and will be marked by a focus on infrastructure investment. The G20 and Organisation for Economic Co-operation and Development (OECD) have already announced a widescale data collection initiative to create benchmarks to monitor the risk-adjusted financial performance of private infrastructure debt and equity investments.

It’s about time.

Investors have 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 survey of major asset owners by the EDHEC Infrastructure Institute (EDHECinfra) and the Global Infrastructure Hub, more than half declared 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?

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

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, EDHECinfra has built the largest database of infrastructure investment data in the world that can be used to create performance benchmarks  needed for asset allocation, prudential regulation and the design of infrastructure investment solutions. These first-of-a-kind benchmarks provide investment metrics that are needed by investors: return, volatility, Sharpe ratio, duration, and maximum drawdown.

In 2019, this database will reach global coverage, and a global index for private infrastructure debt and equity tracking of 1,000 firms will be published.

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

We then selected a list of 400 firms to represent the European infrastructure market by sector, business model or country, covering 50% of the market by size in each year and ensuring a representative sample through time. This became the constituent list for the benchmarks. For each firm, we collected data for realized and forecast cash flow to debt and equity holders. Firms were categorized by type (either as infrastructure project or infrastructure corporate) and by the business model used (contracted, merchant, and regulated).

This project was undertaken in coordination and collaboration with the industry. Data was submitted by banks, asset owners, and managers. This collaboration is a sign the private infrastructure industry is growing towards a more mature and transparent stage in its development. The support of private investors and lenders to this initiative is impressive and deserves to be praised.

In this context, EDHECinfra has also developed data collection and reporting standards that can be used to 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 and improving transparency and efficiency of investment in infrastructure around the world.

Much work remains to be done on this road less travelled. 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 and improve our common understanding of the infrastructure investment sector, better benchmarking results and better investment solutions in infrastructure can be designed.

In 2018, EDHECinfra will launch a new online platform giving investors, asset managers and advisers the ability to access index data, advanced analytics, store infrastructure investment data, build portfolios dynamically, and perform valuation analysis. You can access the EDHECinfra benchmarks online and through Bloomberg (EIPEE & EIPDE).
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.

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Sarah Tame

Associate Director and Chief Communications Officer, EDHEC Infrastructure Institute

Frédéric Blanc-Brude

Director, EDHEC Infrastructure Institute and EDHEC Asia Pacific

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