An Infrastructure Investment Primer: From Valuation to Allocation and Manager Selection

Abstract

Infrastructure investments can play several important roles in the portfolio, from generating yield and income to creating diversification and matching or hedging liabilities. They are also relatively large and illiquid and, as such, present valuation and risk measurement challenges. Stale, biased, and limited contributed data have long left investors and regulators only able to make educated guesses. Recent developments in data collection and asset pricing techniques for private assets allow granular market-based valuations and risk-adjusted return calculations. This article introduces standard definitions for infrastructure investments and styles as well as a modern and robust asset pricing framework for the production of fair valuations and useful risk measures. It also presents stylized empirical facts based on 20 years of data for the risk-adjusted performance of unlisted infrastructure equity, systematic and extreme risks, asset allocation, and fund manager selection.