Abstract
AbstractInstitutional investors expect infrastructure to deliver long-term stable returns but gain exposure to infrastructure predominantly through finite-horizon closed private funds. The cash flows delivered by infrastructure funds display similar volatility and cyclicality as other private equity investments, and their performance similarly depends on quick deal exits. Despite weak risk-adjusted performance and failure to match the supposed characteristics of infrastructure assets, closed funds have received more commitments over time, particularly from public investors. Public institutional investors perform worse than private institutional investors. ESG preferences and regulations explain 25$\%$–40$\%$ of their increased allocation to infrastructure and 30$\%$ of their underperformance.
Highlights
In the past decade, there has been a surge in the allocation of institutional investor assets to infrastructure investments
In Column (1), we find that a 10 percentage point increase in the percentage of exited deals is associated with a 2.69 percentage point higher probability of reporting performance, which further suggests that the standard performance measures may overestimate the performance of infrastructure funds, as such statistics may be under-reported in cases where funds are less likely to exit deals
The commonly heard explanation for why institutional investor demand for infrastructure has risen so much is that infrastructure is a new asset class with attractive attributes such as low sensitivity to swings in the business cycle, little correlation with equity markets, and long-lasting, inflation-linked cash flows
Summary
To study the characteristics of infrastructure as an asset class, we obtain data on the equity positions of institutional investors in infrastructure assets from Preqin (we do not analyze infrastructure debt providers). Unlike closed funds, both listed and open-ended funds do not have a clear termination date and may be better designed to provide long-term exposure to infrastructure assets. Sovereign wealth funds and government agencies are more likely to invest directly in infrastructure assets, but all other institutional investors rely primarily on infrastructure funds as intermediaries. Public pension funds gain exposure to infrastructure assets in a similar way as private pension funds, insurance firms, banks, endowments and foundations. Investors on average obtain 63% ownership in the underlying asset and all investors jointly have 78% ownership in the underlying asset
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