EDHEC, New Research, and Hyper-illiquid Assets

EDHEC, New Research, and Hyper-illiquid Assets

The EDHEC Infrastructure Institute – Singapore has published a new paper describing what it calls the “very first results of an ambitious project to create investment benchmarks for long-term investors in infrastructure.”

The Institute is host to a dedicated team, who for years now have been collecting and aggregating primary data and developing techniques to deal with the tricky parameter here, the hyper-illiquidity of the assets involved.

In a foreword, Noël Amenc, the associate dean of EDHEC Business School,  says that this paper will be just the beginning “of [a] whole new stream of research based on the unique database” created by that team.

The lead author of the paper is Frédéric Blanc-Bride, director of the EDHEC Infrastructure Institute.  Dr. Blanc-Brude is on the advisory board of the Global Infrastructure Facility of the World Bank.

Three Tables

One of the team’s key accomplishments is the creation of a new broad European market infrastructure debt index. Looked at by business model, this index consists in roughly equal parts of merchant, contracted, and regulated issuers. Looked at by country, it is dominated by the infrastructure projects of Great Britain, France, and Spain in that order. By sector, it is dominated by transport and energy.

The tables below show the performance of this index, given two different weighting systems. The figures represent a theoretical buy-and-hold strategy, so that value weighting “simply means holding all the live constituents at time t weighted by their market value,” while equal weighting “means assuming equal shares to each borrower in the index at all times.”

Value Weighted Broad Infra Debt Index

1-year 3-year 5-year 10-year Hist.
Return 3.83% 4.91% 6.72% 6.8% 8.31%
Volatility 4.52% 4.34% 4.29% 4.32% 5.67%
Sharpe Ratio 1.26 1.5 1.9 1.7 1.56

Equally Weighted

1-year 3-year 5-year 10-year Hist.
Return 4.64% 5.83% 7.44% 7.07% 7.95%
Volatility 3.9% 3.78% 3.67% 3.7% 4.09%
Sharpe Ratio 1.86 2.19 2.68 2.3 2.19


For purposes of comparison, the authors also present in tabular form the public corporate market index reference. (These figures are value weighted.)

1-year 3-year 5-year 10-year Hist.
Return 2.78% 3.48% 5.26% 4.75% 5.2%
Volatility 3.18% 2.65% 2.79% 3.16% 2.94%
Sharpe Ratio 1.4 1.9 2.37 1.67 1.77

From these charts we can derive four stylized facts.

Four Stylized Facts

  1. The broad European market infrastructure debt index significantly outperforms the European corporate bond index looking specifically at return and through any of the ranges of time on offer.
  2. The broad market infrastructure debt index has a Sharpe ratio “not significant different from that of the corporate bond index;”
  3. But when the broad market infrastructure debt index has a level of concentration equivalent to that of the corporate bond index, on an equal weighted basis it outperforms the corporate bond index;
  4. Finally, the duration and VaR of the broad market index are both higher than the public senior corporate bond reference index, though they have exhibited converging tendencies over the period 2000 – 2016.

EDHEC has also created two sub-indexes of its broad market infrastructure debt index, one for project finance debt and the other for infrastructure corporates. The authors want to know whether there is a difference between the two and to what extent each may be said to contribute to the performance of the broader index. They employ this distinction in part because they believe that the debate over whether “infrastructure debt is an asset class” is a quite confused debate without it.

The value-weighted infrastructure indexes are very highly concentrated, the authors observe, “even relative to the listed corporate debt reference index,” which as you see in the third table above is also value weighted.

Five More Stylized Facts

If we examine the behavior of the two subindexes described above, project finance and infra corporates, we reach the following five stylized facts,

  1. Project finance does not offer better cumulative outperformance that the broad market index;
  2. It does, though, offer a yield spread that is higher than that of the broad market after 2006;
  3. And on a risk-adjusted basis, project finance debt improves on the corporate bond index by between 30 and 60 basis points per unit of risk along the various time horizons;
  4. Duration and VaR are higher for project finance than for the corporate debt index, but the margin is small and has been decreasing;
  5. The project finance debt index has a lower risk profile than the corporate bonds throughout the period under consideration.

So … is infrastructure a new asset class? These authors answer, project finance is, but infrastructure corporates “probably cannot qualify as a new asset class.”


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