The majority of asset owners and managers surveyed for the latest report by EDHECinfra and the Global Infrastructure Hub said they wanted to increase their infrastructure investments in the next three to five years. However, they also acknowledged that their current performance benchmarks were inadequate when it came to measuring risk.
“They want to invest more but they’re going about it without a compass,” Frédéric Blanc-Brude, EDHECinfra director and co-author of the report, told Infrastructure Investor.
“When infrastructure was a small asset class – something investors did on the side – it didn’t really matter,” he said. “But now, when large institutions have 5 percent or more of their total assets invested in infrastructure, all the risk management people, the asset allocation people are saying, ‘We need better information to invest’.”
The survey, which polled more than 300 respondents accounting for $10 trillion in AUM, found that nine out of 10 believed current financial benchmarks were inadequate for asset-allocation, performance-monitoring and risk-management purposes.
“When you say your benchmark is the risk-free rate plus 5 percent, which is what many people use, that’s 5.5 percent, which is low and very easy to beat,” Blanc-Brude explained. “It’s not very ambitious.”
He said that one way to address the problem of inadequate benchmarks“ is to make sure you use the valuation methods that are closest to fair value as possible. The second is to build benchmarks which can be representative of where investors are at and how well they’re doing over time.”
EDHECinfra was founded in 2016 by EDHEC Business School. It has been collecting data since its launch and working towards creating performance benchmarks to help investors better understand the risks they are taking when investing in infrastructure. In June, it will launch a platform that will include all the indices and data it has collected.
“In a way, this is a sort of coming of age of infrastructure investment,” he said. “Until now, people have kind of been looking at the stars trying to find their way, but now we’re going to provide a map of the world.
“It’s what happened with other asset classes, such as real estate and hedge funds. As those became more mainstream and popular, people started collecting data, building benchmarks, doing exactly what the investment process required, because this was how the industry was going to grow.”
Among the other trends the report identified was a levelling-off of appetite among infrastructure investors for emerging markets. Of those already investing in these markets, 63 percent said they intended to increase their existing allocation, compared with 94 percent in 2017.
As for advanced economies, the five most popular markets investors intend to invest in over the next five years are the US, Australia, the UK, Germany and France.
Alsonoteworthy was the overwhelming majority of those surveyed – 97 percent – who believe that environmental, social and governance factors are important considerations in infrastructure investment, up from 86 percent in 2016.