Benchmarking infrastructure investments has become a vital condition to the development of the asset class, according to the EDHEC-Risk Institute.
In a position paper published today, the research body argued that the increasing popularity of infrastructure has the potential to help match the supply and demand of long-term capital, improve asset allocation outcomes for investors, forge better prudential regulation and support economic development.
Yet for allocations to grow in a sustainable fashion, investors need robust information on the performance they can expect from such investments over time and in various economic environments, it said. Regulators, meanwhile, need to evaluate the risks investors are taking to adequately balance their prudential frameworks.
The institute added that the nature of long-term investment in infrastructure meant that extensive data collection, while crucially needed, will not be sufficient and will have to be combined with sophisticated asset pricing and risk measurement tools.
The institute thus suggested an eight-step roadmap to reach this desired outcome. At the level of individual instruments, it argued for focusing on defining underlying financial assets, using adequate pricing models for thinly traded instruments, defining data collection needs and standardizing performance reporting to create a global database of infrastructure cash flows.
It also saw progress possible at the portfolio level. “While a basket of long-term and illiquid infrastructure project debt or equity is not easily or instantly investable, it is possible to design and estimate the performance characteristics of constructs that have typical exposures to well-documented infrastructure risks such as greenfield or brownfield risks, merchant or contracted revenue risks,” it said in a statement introducing the research.
These would help guide different investment strategies and create useful benchmarks for asset allocation, investment manager evaluation and more precise measures of the risk-weights required by prudential regulation.
The institute did recognize the challenge associated with the task. “The development [of benchmarks] is particularly challenging in the context of infrastructure investments marked by the heterogeneous and lumpy nature of the underlying assets and the private, illiquid and thinly-traded nature of the markets in which financial claims to the revenues produced by these assets are originated and exchanged.”
But it thought that the support and involvement of policy makers, regulators, banks and infrastructure investors, along with further research advances, would help garner the common knowledge needed to cement such measures and instruments.