Avenue of Giants Long-Weekend Reading

In many parts of North America, this weekend – the long Memorial Day weekend – is the kick off to summer. And that means BBQs, cold beverages and, if you’re a sadist, some academic reading material.


Brian Chu

In many parts of North America, this weekend – the long Memorial Day weekend – is the kick off to summer. And that means BBQs, cold beverages... and, if you’re a sadist... some reading material:

- Dimitrij Euler has a new paper entitled, “Impact Investment: Sovereign Wealth Funds, Corporate Governance and Stock Markets.” Here’s a blurb: “In the light of the ever-dwindling resources that will be addressed by our future generation, impact investors invest in accordance with ethical and environmental principles going beyond financial performance. In particular, Sovereign Wealth Funds invest in assets worldwide in accordance with ethical and environmental principles and significantly influence the investment sphere and how enterprises are managed. In the last decades, corporate governance and stock market rules require information beyond financial performance and have changed the information requirement of how listed enterprises have to inform. Although this had an impact towards a more transparent market, the law has to establish obligations broadly reflecting the needs of impact investors and thereby taking the chance of contributing more significantly to development. Inspired by the success of the Norwegian Governmental Pension Funds addressing environmental, social and economic policies in their investment strategies, this paper elaborates responses to impact investors referring to disclosure obligation under corporate governance and stock market rules in the USA, the EU (UK and Germany) and Switzerland.”

- Erling Steigum has a new paper entitled, “Sovereign wealth funds for macroeconomic purposes.” Here is a blurb:

“Sovereign wealth funds (SWFs) have become more numerous after the turn of the century. The largest ones are older and have been set up by nondemocrat countries in the Middle East and Asia. Norway’s large SWF is an exception. In democratic societies, SWFs have been established in Australia, New Zealand and Ireland to pre-fund pensions in response to expected population ageing. The management of Norway’s Fund has been index-based, with only a very small role played by active management. In most other SWFs around the world, active management is much more important, and the cost of management is significantly higher than in Norway. The academic literature suggests that although active management could be beneficial, many empirical studies do not support the belief that external active management generates excess after-fee returns. An empirical study of active management in Norges Bank finds that 70 percent of the (small) active management results from equity can be explained by other systematic risk factors than market risk. There is no strong consensus about how a global fund should diversify its assets among asset classes and currencies. We argue that SWFs could have positive macroeconomic effects in democratic welfare states if the government runs pension programs financed on a pay-as-you-go basis, and future population ageing is significant. Still, a SWF is hardly politically feasible if there is no broad agreement in the electorate and among political parties that fiscal surpluses and a SWF are worthwhile.”

- Rajiv Sharma has a new paper entitled, “The Potential of Private Institutional Investors for the Financing of Transport Infrastructure.” Here’s the abstract:


“It is widely held that large institutional investors such as pension funds and sovereign wealth funds with long term liabilities and a low risk appetite are ideally suited to invest in transportation infrastructure assets. Despite the theoretical ideal match between a large source of capital and an asset class in need of investment, the uptake of institutional investors has been slow. This has been due to bad experiences with early investments and the uncertainty associated with investing in some transportation infrastructure assets.

This paper seeks to shed light on the complex nature of institutional investment in the transportation sector. This is achieved by examining the different investment vehicles that have developed in financial markets to provide opportunities for institutional investors. Unlisted equity vehicles have provided the greatest opportunity for institutional investors and it is through these investments that the characteristics of an asset class have developed. Both listed and unlisted products have been affected by the financial crisis indicating that the assets are not quite as robust to economic climate as was previously suggested. With Basel III regulations affecting the ability of banks to provide loans for projects, infrastructure debt funds have provided the latest opportunity for institutional investors to invest in debt products backed by stable infrastructure cash flows.

Analysis of the unlisted infrastructure investor universe indicates that investors can be segmented by size, governance capability and method of investment. Smaller, inexperienced investors are greatly reliant on and influenced by financial intermediaries for their investment decisions in infrastructure, including asset allocation and type of assets invested in. Larger investors with greater in house governance capability will usually have a clearly defined investment mandate for infrastructure and deploy their capital accordingly. All investors in search of stable, predictable, low risk returns must ensure that the underlying asset invested in through the various vehicles reflects the specific definition that they have associated with the asset class.

At the asset level, there are a number of investor considerations associated with the mode of private offering set up by the government. In a Public Private Partnership (PPP) arrangement, institutional investors can invest in the higher risk, development stage of a project or lower risk operational stage. Construction and demand risk appear to be of most concern for institutional investors investing in PPP projects. The method of funding set up by the government, either through toll revenues or availability payments will affect the risk borne by a private investor and the type of investor attracted to the project. i.e. availability payments will attract debt investors while tolls will be more suited to equity investors. In fully privatised transportation infrastructure, the main consideration for institutional investors is the regulatory framework affecting cash flows that the asset operates under. Other asset specific considerations that are inherent in transportation infrastructure in both the PPP and fully privatised form include corporate governance, reputation and political risks. The Auckland Airport and 407 toll road examples illustrate that while private investors have benefitted from investing in the respective assets (through favourable regulatory and contractual conditions), short term political influences can harm the performance and reputation of investors. The BAA case study shows the effect of a heavy regulatory clampdown but also demonstrates the importance of adopting responsible corporate governance models, taking into account the wider stakeholder interest when employing a shareholder wealth maximisation strategy. Finally, the Canada Line PPP provides an example of a DBFO project with construction risk that has been able to attract private institutional investment and successfully execute on its deliverables.

The paper concludes by suggesting that private institutional investment in transportation infrastructure is dependent as much on the development of trust in the long term relationship between investors and financial intermediaries as through the formulation of consistent government policy on procurement and regulation. Collaborations such as the UK’s Pension Infrastructure Platform, the Rebuild America Partnership and Europe’s 2020 Project Bond Initiative would indicate that the required consultations are taking place. Essentially a deeper appreciation of the objectives of each party is required in the respective decision making processes.”

Enjoy your weekend. Be back on Wednesday!