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New Developments in Long-Term Asset Management

Supported by Norges Bank Investment Management
Monika Piazzesi and Luis Viceira, Organizers
Fourth Annual Conference
Cambridge, MA

May 9-10, 2019

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The Subsidy to Infrastructure as an Asset Class

By Aleksandar Andonov, Roman Kräussl, and Joshua Rauh

Institutional investors are becoming increasingly active alongside governments in the provision of capital to infrastructure projects. The stated value proposition of infrastructure as an investment is that it has attractive financial attributes: low sensitivity to the business cycle, little correlation with equity market, long-term stable and predictable cash flows. But do the infrastructure investments live up to this promise?

We investigate the characteristics of infrastructure as an investment from the perspective of a limited partner. Even though the World Bank and the OECD promote infrastructure as an asset class in order to attract private capital and reduce fiscal pressure on governments, public sector investors still provide a lot of funding. Public institutional investors, like public pension funds, sovereign wealth funds, and government agencies account for 45.52 percent of commitments to infrastructure funds and for 70.95 percent of direct investments in infrastructure assets.

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Which Investors Matter for Global Equity Valuations and Expected Returns? Ralph S. J. Koijen, Robert J. Richmond, and Motohiro Yogo

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What's Wrong with Pittsburgh? Delegated Investors and Liquidity Concentration, Andra C. Ghent

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The Benchmark Inclusion Subsidy, Anil K. Kashyap, Natalia Kovrijnykh, Jian Li, and Anna Pavlova


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The majority of investments by institutional investors is made through closed funds that have a private equity structure. Infrastructure funds do not deliver more stable cash flows to institutional investors than other alternative assets. Based on the amounts of capital calls and distributions over time, the stream of cash flows delivered by infrastructure funds is very similar to that delivered by other private funds. The net cash flows delivered by infrastructure funds are also sensitive to the business cycle, as they are high when the price-dividend ratio is high. When analyzing the performance distribution as a proxy of riskiness, we find that the distribution of returns delivered by infrastructure funds is as wide as the distribution of returns delivered by buyout and real estate funds. The cash flows and performances delivered by infrastructure funds depend primarily on selling the underlying assets, which does not deliver stable payout and is not in line with the stated objectives of long-term investors.

Public investors perform worse than private investors in their infrastructure investments, although they are exposed to underlying deals with very similar project stage, concession terms, industry, and geographical location. Public investors obtain 1.277 percentage points lower IRR, 0.061 lower multiple of invested capital, and 0.041 lower public-market equivalent. The ability to measure deal characteristics allows us to control for factors that capture the risk of the underlying infrastructure assets.

The lower performance of public institutional investors suggests that they are susceptible to subsidizing infrastructure as an asset class. At the current $173 billion exposure level of public investors, we estimate this subsidy at a minimum of $1.3-$1.5 billion per year if the alternative opportunity is the S&P 500 or real estate funds, $3.3 billion per year if compared to listed infrastructure funds, and $8.5 billion per year if compared to private equity buyout funds. It seems that public investors are not pursuing strategies whose goals are pure value maximization in asset classes closely linked to government policies. However, given the relatively low share of local infrastructure investments, much of the subsidy is going to regions and countries that are outside of the institutional investor’s home state or country.

 
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