With the support of LTIIA, EDHECInfra recently published a new paper “Is Infrastructure Shockproof?” examining the resilience of infrastructure equity investments during market downturns, 2000-2022. The following interview with Vincent Levita, Chairman of LTIIA and CEO of InfraVia Capital Partners, about the paper’s findings and its industry relevance, is extracted from EDHECInfra Newsletter-Dec2022.
In the latest research paper “Is Infrastructure Shockproof?”, why was it important for LTIIA to address the topic of market shocks and risks in infrastructure currently?
The LTIIA sees itself as not just another “lobbying” association that focuses on public advocacy, but also as a provider of content and added value for what is still, an emerging asset class.
Many of our members who are investors have predicated their strategy on the assumption that unlisted infrastructure is a defensive asset class whose essential characteristic is of that which protects them against market downside.
However, most of our fund manager members have been set up over the last 10 to 12 years and have only seen one big crisis (the GFC) until the 2020-21 Covid-induced crisis and the subsequent, current multi-pronged crisis (economic, supply chain, energy and inflation).
Many of them did not have first-hand experience of how their portfolio would react in times of large external shocks. They are therefore keen to get relevant data analysis and guidance at this stage, particularly in view of the volatility and complexity of the overall economic situation.
How have investors responded to the recent market shocks that have not been in line with expectations?
Since our investors are largely, by design, long-term investors (this is LTIIA’s raison d’ etre), with a time horizon of 20 years or more in their investment strategies in infrastructure, most of them have not challenged their allocation strategy. However in the current market, one can already discern a stronger emphasis on the energy transition to renewables, particularly with our investors based in Europe, which has grown on the back of the Russian-induced gas energy supply crisis.
What are the most significant conclusions that investors can take away from in this research?
Taking into account that the data does not reflect the most recent developments in 2022, the conclusions are manifold. Firstly, while Infrastructure isn’t an all-weather guarantee against big economic shocks, it does effectively protect against short-term fluctuations.
Secondly, the various infra models (regulated, contracted, merchant) have different behaviours in responding to market shocks in terms of discount rate changes, inflation pass-through and the capacity to grow cash-flows.
This paper highlights the downside risk due to a likely increase in market risk premia and the various levels of correlation with capital markets (bonds and equities mainly) and last but not least, it underscores the need to achieve sufficient size & diversification in one’s unlisted infrastructure portfolio in order to fully benefit from its protective dimension.
How will the findings of this paper help investors make better-informed investment decisions?
We are living through a particularly delicate moment as two market phenomenons are converging: 1) A trend towards greater complexity and volatility in the infra scene and 2) A surge in fundraising by dedicated infra investors. In the first-half of 2022 alone, a total of $120 billion has been raised that exceeds more than twice the previous years’ average.
This is where having a comprehensive data-analysis process will help Infra fund managers and decision-makers in their allocation decisions.
What is the next important question you would like to see addressed in future LTIIA-sponsored studies?
There are several. Firstly, I would like to further investigate a causal link between the ESG rating and the financial performance of firms, following your first study in February 2019.
Secondly, I would like to address the question of whether Institutional investors use the most appropriate investment structures when investing in infrastructure. The Stanford Institute for policy research has posited that the vehicle most frequently used by investors – the close-ended fund – is not optimal for long-run stable cash flows. Listed funds, open-ended funds and direct investments may perform better and we’d like to assess its impact on the performance of institutional investors’ infrastructure investments has been underwhelming in comparison to other asset classes.
As the new chairman of LTIIA, what are some of the industry issues that are closest to your heart or top of your list to advocate for? How will you steer LTIIA differently under your new leadership?
I want to show that infrastructure investment can play an instrumental role in helping investors cope with the current financial, climate, and social issues. I would like to support our ecosystem (LPs, GPs, Regulators, Industrial players, Policy makers) in their decision-making and enable the development of infrastructure as an asset class. I would like to further enlarge our sphere of action beyond Transportation and Energy, to Telecommunications/Technology and Social (Healthcare, Education).
I would also like to advocate for Infra companies to have more capacity to effectively transfer the impact of inflation to their clients (public or private end-users) be that in legal, contractual, political and social aspects.
And lastly, I would like to facilitate access to unlisted infra for retail investors and the corresponding needs in data accessibility, risk assessment and liquidity requirements.
Download the paper “Is Infrastructure Shockproof?” here