In this paper, the authors conduct the first large scale empirical analysis of the characteristics of revenue and profits in private infrastructure firms and test two important ideas: whether infrastructure firms correspond to a different business model than other firms active in the economy, and whether they exhibit different equity payout behaviour.
The results show that infrastructure firms are indeed unique and exhibit lower revenue volatility, higher payouts, with considerably less correlation with the business cycle. The findings also reveal that the existence of “infrastructure business models” (“contracted”, “regulated” and “merchant”) each with its own unique cash flow dynamics, are more alike amongst themselves than compared with the rest of the corporate universe.
The paper uses a new and unique set of hand-collected data including the cash flows of more than 330 UK infrastructure firms going back 15 years. EDHECinfra Director, Dr Frédéric Blanc-Brude said the results from this study have implications for investment management and prudential regulation.
“The significant difference of revenue volatility between infrastructure and non-infrastructure firms, strongly suggest that infrastructure firms are in a league of their own when it comes to both their business model and their dividend payout behaviour,” Dr Blanc-Brude said.
Chairman of LTIIA and Chief Executive Officer of Meridiam Infrastructure, Mr Thierry Déau said, “The paper provides much needed evidence on the risk profile of infrastructure and its unique features as an asset class. Not only can this research benefit investors in their portfolio decisions, it can also help build a deeper alignment between infrastructure investors and regulators,”
The next steps with this research include using these findings to calibrate cash flow models to develop fully-fledged infrastructure investment benchmarks which are the next planned output of the new EDHEC-LTIIA Research Chair.
A copy of “Revenue and Dividend Payouts in Privately-Held Infrastructure Investments” can be downloaded here
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