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Asset Allocation and Alternative Diversification

Natixis "Investment and Governance Characteristics of Infrastructure Debt Instruments" Research Chair

The purpose of the Natixis “Investment and Governance Characteristics of Infrastructure Debt Instruments” research chair is to contribute to clarifying the nature and investment profile of infrastructure debt instruments in order to reduce the relative shortfall of publicly available investment data on the subject, compared to longer established investment segments. The chair will specifically focus on the risk and return characteristics and portfolio diversification benefits that infrastructure debt instruments can bring to institutional investors.

Infrastructure projects are mostly financed using highly leveraged limited recourse financial structures demanding in-depth delegated monitoring by credit providers to ensure credit quality. Limited recourse project financing has long been the preserve of banks and, since the 1980s, close to US$2Tr of infrastructure project bank debt was originated and syndicated by global banks. However, recent developments in the banking sector and the implementation of Basel 3 suggest that infrastructure debt origination by banks will become uneconomic and that new models are necessary.

Against this background, institutional investors have developed an interest in infrastructure as a form of alternative investment. They are particularly interested in the cash flow-driven approach that characterises infrastructure finance and the high level of credit quality achieved by project finance structures.

The research chair will involve three years of academic research on the nature and performance of fixed-income instruments applied to infrastructure financing and their potential benefits for institutional investors.

The first year of the chair will focus on the underlying, and will result in a paper on the nature and characteristics of infrastructure project investing, with a focus on the role of debt instruments in the financing, governance and performance of these projects. This paper aims to review and develop existing academic knowledge about infrastructure project finance in order to foster a better understanding of the nature of these assets amongst institutional investors.

The second year of research will consist of an empirical study of the performance of debt instruments used in infrastructure projects in the context of portfolio management. The corresponding paper will aim, amongst other things, to establish benchmarks for institutional investors in terms of expected returns, risk and correlations with other types of assets, as well as the liability hedging potential of this type of asset for pension funds.

The third and final year will focus on the valuation of assets using infrastructure debt as underlying, from both financial and accounting perspectives, and the implications in terms of financial regulation.

The chair is under the leadership of Frederic Blanc-Brude, Research Director, EDHEC Risk Institute—Asia, who has more than ten years of research experience in the infrastructure sector and has published numerous academic papers on this topic.

[Press release announcing the creation of the research chair: 22/10/12]

Research output:

Unlisted Infrastructure Debt Valuation & Performance Measurement: Theoretical Framework and Data Collection Requirements
July 2014
Frédéric Blanc-Brude, Majid Hasan, Omneia R.H. Ismail
Building on advanced and robust credit risk modelling and private debt valuation techniques, this paper focuses on delivering those performance measures that are the most relevant to investors at the strategic asset allocation level, and to prudential regulators for the calibration of risk weights. It provides a implementable framework for the formation of risk and return expectations in illiquid infrastructure debt, and also defines the most parsimonious data input requirements. Hence, we can realistically expect to deliver these performance measures at a minimal data collection cost. [Press release announcing the publication of the research: 31/07/14]

Who is afraid of construction risk?
July 2013
Frédéric Blanc-Brude, Omneia R. H. Ismail
This paper examines the known investment characteristics and portfolio diversification properties of infrastructure debt. The analysis is focused on project finance debt since it represents the bulk of existing and, in all likelihood, future infrastructure debt and also because, contrary to the notion of `infrastructure', it benefits from a clear and internationally recognised definition. The objective of the study is to highlight the credit risk characteristics of infrastructure debt for the purpose of institutional investing, in the context of pension funds and insurance companies' need for long-term assets creating predictable cash flows, both to manage their liabilities and also minimise their exposure to capital market volatility.

About Natixis

Natixis is the corporate, investment and financial services arm of Groupe BPCE, the 2nd-largest banking group in France with 21% of total bank deposits and 36 million clients spread over two networks, Banque Populaire and Caisse d’Epargne.

With around 15,000 employees (excl. financial stakes), Natixis has a number of areas of expertise which are organised in three main business lines: Wholesale Banking, Investment Solutions and Specialized Financial Services.

A global player, Natixis has its own client base of companies, financial institutions and institutional investors as well as the client base of individuals, professionals and small and medium-size businesses of Groupe BPCE’s two retail banking networks.

Listed on the Paris stock exchange, it has a solid financial base with a CET1 capital under Basel 3 (1) of €12.7 billion, a Basel 3 CET1 Ratio (1) of 10.6% and quality long-term ratings (Standard & Poor’s: A / Moody’s: A2 / Fitch Ratings: A).

Natixis Global Infrastructure & Projects (“GIP”) is a recognised player in the Infrastructure space. GIP has notably obtained the following rankings and awards:

  • #1 Arranger in France for PPP, Concessions or DSP by Le Magazine des Affaires
  • #1 Financial Advisor to sponsors in France by Décideurs
  • #3 Infrastructure Bank of the Year in Europe by Infrastructure Investor
  • #15 Global MLA for Project Finance by Thomson Reuters

Sources: (1) Based on CRR-CRD4 rules published on June 26, 2013, including the Danish compromise - no phase-in except for DTAs on loss carry forwards - Figures as at March 31, 2014.


Natixis website: www.natixis.com
Natixis Infrastructure & Projects website: cib.natixis.com/infrastructure