Equity Infrastructure Investment – The Next Big Thing?

(January 16, 2013) — Leading European academics have begun a research initiative to examine how institutional investors could better access and benchmark equity investment in infrastructure.

The Edhec-Risk Institute has launched a research chair to concentrate on an increasingly popular asset class, but using a relatively unused manner of investment.

“It will focus on fostering data collection and aggregation from investors and on improving the benchmarking of return distributions for direct and indirect investment in infrastructure equity by developing an academically-validated and industry-recognised index,” the institute said this week.

Investment firm Meridiam Infrastructure and advisory Campbell Lutyens are co-sponsors of the research chair.

To coincide with the launch, the institute has published a foundation paper on the issue that sets out the task in hand.

The paper, “Towards Efficient Benchmarks of Infrastructure Equity Investments“, highlights a recent research quandary with respect to infrastructure equity investment, which has also been a question for final investors.

“While the economics of underlying infrastructure investment suggest a low and potentially attractive risk profile, the experience of investors and available research evidence have been different and rather mixed. This paper explains why this has been the case and what new research and benchmarking efforts are necessary to create investment solutions that align expectations and observed investment performance of infrastructure equity,” the institute said.

The paper concludes that existing data on the sector needs to be reclassified, new data collected and significant theoretical work needs to be done before appropriate benchmarks can be created. It added that this work would also help test the sensitivity of equity investment to different categories of risk found in project finance, regulated utilities, and other infrastructure areas.

Separately, a note from the United Kingdom’s National Audit Office (NAO) today said there was a danger that institutional investors would not commit to infrastructure projects unless they were insulated from construction risk.

The NAO said the £20 billion targeted by the UK government may not be achieved if mitigating actions were not made to reassure investors.

To read the Edhec-Risk Institute paper, click here.

To read the note from the NAO, click here.