This paper produced as part of the NATIXIS research chair on “Investment and Governance Characteristics of Infrastructure Debt Instruments,” is the first of a series discussing the opportunity for long-term institutional investors such as pension funds, insurance companies or sovereign wealth funds, to invest in large portfolios of infrastructure debt, both to manage their liabilities and to enhance yield.
In “Who is afraid of Construction Risk,” the authors focus on the question of credit risk in infrastructure investment but also address a public policy question that has come to the fore since the financial crisis of 2007-9: should pension funds and insurance companies invest significantly in new infrastructure projects?
The public sector can get new infrastructure built to support future growth with the support of institutional investors. However, it must also commit to the quality and standardisation of the contractual frameworks used to procure these projects, to the stability of the regulatory framework and to a transparent and significant pipeline of future projects leading to new debt issuance, which will prove essential to maintain portfolios of infrastructure debt at the desired level of return and risk.
The study leads to the conclusion that investors should embrace construction risk. Research Director and co-author Frédéric Blanc-Brude argues that “not only because construction risk is not as high in private infrastructure investment as investors often imagine, but especially because it should be seen as a welcome diversifier of credit risk in infrastructure debt portfolios.”
A copy of “Who is afraid of Construction Risk” can be downloaded via the following link:
This research was supported by NATIXIS as part of the “Investment and Governance Characteristics of Infrastructure Debt Instruments” research chair at EDHEC-Risk Institute.