Investors should avoid categorising infrastructure by industry sector and 鈥渂undling鈥� it with real assets, according to a leading academic.
Fr茅d茅ric Blanc-Brude, research director at EDHEC-Risk Institute, told IP Real Estate that such practices do not create useful information for asset allocation or benchmarking.
鈥淭he emphasis on infrastructure as a 鈥榬eal asset鈥�,鈥� he said, 鈥渆ncourages investors to fixate on industrial sectors rather than contractual and financial structures, when the latter explain most of the risk profile and required returns.鈥�
EDHEC-Risk Institute is working alongside industry associations, including the Long-Term Infrastructure Investors Association (LTIIA) to create a series of benchmarks for the asset class.
鈥淪o much marketing has been put into the word infrastructure. But from an investment point of view, it is basically meaningless.鈥�
Fr茅d茅ric Blanc-Brude
EDHEC is also collecting data from investors, partly in response to demand from regulators and partly to help asset allocators and investors assess performance. It has published a paper describing the framework and the data needed to create infrastructure debt and equity investment benchmarks and is building a database, which will include 15 to 20 years of cash flows for at least 1,500 infrastructure investments worldwide by 2016.
Infrastructure tends to be considered high-risk by regulators, a concern for both investors and policymakers seeking to fill the infrastructure funding gap, said Blanc-Brude. Benchmarks are needed because regulators want to understand the risk profile of the asset class, while investors want to use it for liability hedging.
鈥淚f we don鈥檛 have answers to these questions, it is more difficult to get investment moving,鈥� Blanc-Brude said.
EDHEC and LTIIA argue that benchmarking and risk profiling should be focused on the financial and legal structuring of infrastructure investments, rather than traditional approach of categorising investments by industry sector.
鈥淚n the real world, building a bridge is not the same thing as building a power plant,鈥� Blanc-Brude said. 鈥淏ut, from an investment perspective, it may not be the most important difference 鈥� and yet people still continue to categorise this information by sector.鈥�
Investments in roads, for instance, can have very different risk profiles, depending on whether they involve toll roads, where income is dependent on traffic, or 鈥榓vailability payment鈥� roads, where income comes from governments.
Blanc-Brude said: 鈥淭here is more in common between certain projects in the transport sector and the social infrastructure sector in terms of risk profile than two projects in the same sector, which can have completely different structures and completely different risk profiles.鈥�
It can be hard to convey this concept because 鈥渟o much marketing has been put into the word 鈥榠nfrastructure鈥�,鈥� he said. 鈥淏ut from an investment point of view, it is basically meaningless. You really have to ask other questions.
鈥淚nfrastructure is not a 鈥榬eal asset鈥�, because the special purpose vehicles that you can invest equity or debt in, don鈥檛 own anything tangible.
鈥淎ll they have is a contract with the government, which says you shall build it for 25 or 30 years, and receive a pre-agreed income or have the right to collect a toll calculate to a pre-agreed formula.
鈥淏ut the asset 鈥� the road 鈥� remains in the public domain. It is not actually owned by the investors. Even when investors own the tangible asset outright, its value is determined by contracts and regulations.
鈥淭his is very different to real estate: a piece of land has intrinsic value 鈥� it鈥檚 a store of value. Infrastructure is not a store of value. If it cannot be used, it is not worth anything. That is because, in the jargon of economics, infrastructure assets are highly 鈥榬elationships鈥� specific鈥�.鈥�
For more information on infrastructure investments, look out for IP Real Estate鈥檚 Special Issue on the asset class later this month
