Infrastructure - June 26, 2015

The Valuation of Privately-Held Infrastructure Equity Investments: Theoretical Framework and Data Collection Requirements

This paper proposes a valuation framework for privately-held and very illiquid assets such as equity stakes in infrastructure projects.

Such a framework is one of the key steps identified by EDHEC-Risk Institute as part of a roadmap to design long-term infrastructure investment benchmarks that can take into account the nature of such assets as well as the paucity of available data.

Indeed, the design of an academically validated valuation framework, while necessary to ensure adequate performance measures, is constrained by the practical limitations of collecting private information that is scattered amongst many investors and is often confidential in nature.

The approach taken by the authors aims to balance the objective of using academically sound pricing models with that of requiring a parsimonious data input, thus making the necessary data collection process cost-efficient and realistic.

To address these issues, this paper develops a cash flow forecasting model and a pricing model that make use of powerful but simple Bayesian statistical principles, thus allowing the leveraging of available information as well as built-in learning, as and when new data become available.

This research also leads to the creation of a data collection template for infrastructure investors and their managers, which could be a useful starting point for a reporting standard of private infrastructure investment data and performance. With such a standard, industry-wide data collection can take place and the knowledge of the risk-adjusted performance of infrastructure equity investments can be improved to the point where asset allocation decisions and the calibration of prudential frameworks do not have to treat infrastructure investment as a known unknown anymore.

This research was produced as part of the "Infrastructure Equity Investment Management and Benchmarking" research chair at EDHEC-Risk Institute, in partnership with Meridiam and Campbell Lutyens.

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(1) http://www.edhec-risk.com/edhec_publications/all_publications/RISKReview.2015-04-02.3452/attachments/EDHEC_Publication_Valuation_Privately-Held_Infrastructure_Equity_Investments.pdf