Significant concerns have been raised about valuation practices among investors in unlisted infrastructure assets by the EDHEC Infrastructure & Private Assets Research Institute (EIPA).
EIPA said the Fair Value or Fair Guess? Inside the Engines of Infrastructure Valuation survey had found “serious flaws”, and provides “clear evidence of variability and inconsistency” in valuation practices among investors in unlisted infrastructure assets.
The majority of the 79 respondents were headquartered in Europe, followed by those based in North America and then Australia.
Report author Timothy Whittaker, director of the EDHEC Infra & Private Assets Research Institute, said in the report: “The survey conducted provides clear evidence of substantial variability and inconsistency in valuation practices among investors in unlisted infrastructure assets.
“These findings highlight significant fragmentation within the industry, particularly in the methodologies employed, such as forecasting cash flows, terminal value estimations, and discount rate calibrations.”
He added that this diversity “significantly hampers comparability across different investment vehicles, presenting challenges for investors, regulators, and stakeholders in assessing true asset values and investment performance”.
The research identified “systemic conservatism” in valuations, with the majority of respondents consistently achieving higher exit prices compared to their internal valuations, predominantly reflecting premiums ranging from 6% to 20%, the EIPA report said.
“This reveals a potential structural bias within current valuation methodologies, calling into question the accuracy and reliability of interim valuations and their alignment with fair value,” Whittaker said in the survey.
Other findings included limited responsiveness among investors to changing market conditions, with only a third actively adjusting valuations during market stress periods.
“This rigidity could lead to valuation smoothing, masking volatility and creating risks for accurate performance measurement and risk management”, the report stated, adding that “a lack of consensus on the appropriate application of financial models, especially the capital asset pricing model, further underscores the uncertainty in the industry regarding suitable valuation techniques for private infrastructure assets.”
Key recommendations
Whittaker said that due to the EIPA survey’s findings, “there is an urgent need for enhanced governance frameworks and standardised valuation protocols to foster transparency, comparability, and investor confidence”.
“Regulatory bodies and industry stakeholders should actively pursue the development and implementation of clearer valuation guidelines, incorporating explicit calibration of discount rates, rigorous validation of management inputs, and proactive responsiveness to market dynamics,” he added in the report.
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