Infrastructure: A benchmark for rebuilding trust
Pension investors’ interest in infrastructure assets has been rising in recent years, with more than half of those surveyed by Preqin for its most recent investor outlook, saying they would increase exposure to the asset class in future.
However, the dearth of suitable products through which to invest – or benchmarks to measure asset managers’ success – has hindered the pensions industry, despite the rhetoric and undoubted appetite to acquire such assets.
To this end, the EDHEC Infrastructure Institute-Singapore is working on its first benchmark for infrastructure, gathering data on the performance of hundreds of assets – both in the equity and debt categories – to give asset owners a better understanding of the sector’s performance.
Frédéric Blanc-Brude, director at EDHEC’s Singapore-based institute, acknowledges the project is “very ambitious”. But he hopes its dataset will treble in size to 1,500 by the end of next year. Even with its existing data on 500 assets, with performance metrics stretching back two decades, EDHEC stands to present a fully functioning index with a backdated performance record.
Blanc-Brude, in a paper authored with EDHEC’s head of asset pricing Majid Hasan and head of data collection Tim Whittaker, claims the dataset, which includes the cash flows of more than 300 UK infrastructure companies, has allowed EDHEC to identify the unique characteristics behind privately held infrastructure firms.
And they argue that infrastructure firms are “truly unique”. “That is [to say], after controlling for size, leverage and profitability, as well as the impact of the investment ‘lifecycle’, infrastructure firms exhibit lower revenue volatility and higher payout ratios than any other group of private or public firms.”
The authors of the report, Revenue and Dividend Payouts in Privately Held Infrastructure Investments, say the sample of infrastructure firms, when compared with a control group, had lower revenues and profits per each dollar invested, underlining how resource-intensive the sector is. But they say they also found “significantly” lower volatility, which is likely to convince many pension investors they should continue to pursue such assets as a means of providing reliable returns.
Despite an overall positive take on the sector, a survey by EDHEC and the G20-backed Global Infrastructure Hub (GIH), previewed at a recent conference, finds that many institutions are still uncomfortable with the ways in which they are able to access infrastructure.
Of the asset owners surveyed, only half would “trust the [asset] valuation” put forward by their own infrastructure managers, according to Blanc-Brude. He says he took this to mean that the other half of respondents did not understand what their asset return should be, as they did not trust managers to report any gains truthfully. Additionally, only 3% of respondents said current vehicles for infrastructure investment fulfilled their needs, while 80% agreed that structures met their needs only partially.
For many investors, this raises the question of how to proceed. Pension investors, with an interest in and appetite for infrastructure, will pursue opportunities as they arise.
The more “sophisticated” asset owners – which, according to EDHEC’s survey, see infrastructure as covering a range of risk factors, as opposed to simply an asset class – can invest directly. This is likely to give them a better understanding of the assets’ cash flows and revenues. Smaller pension funds, however, or those wishing to diversify by holding a large number of smaller assets, will have little choice but to turn to a badly structured market, run by managers they distrust.
The development of EDHEC’s benchmark will go some way towards rebuilding trust, giving investors a tool to measure performance accurately. But with such a negative perception of the sector, pension investors have to find a way to get a better understanding of the market and work with providers they trust, or collaborate with like-minded asset owners, bypassing the asset management market altogether.