Our latest webinar jointly organized with EDHEC Infra earlier this month presented a new research paper sponsored by LTIIA on the drivers of volatility in unlisted infrastructure investments.The volatility of infrastructure equity investments is the risk which investors take to receive a reward for holding such assets. Therefore, a robust measure of risk and its drivers is an essential part of the inclusion of infrastructure investments in the portfolio, from strategic asset allocation, to risk management and reporting, to manager compensation. However, measuring this risk is difficult because the only available data is often limited and typically reports unrealistic total return volatility. Drawing from the robust asset pricing research and results of EDHECinfra, the paper examines the drivers of the volatility of unlisted infrastructure equity investments. It demonstrates that beyond stale Net Asset Values and smooth volatility, it is possible to capture the impact of systematic market factors on illiquid assets like unlisted infrastructure equity and document the role of interest rates, risk premia and cash flows independently.
Overall, we find that there is a higher return volatility than typically perceived: while cash flows are rather stable over time, the long life of infrastructure investments make them sensitive to changes in discount rates, themselves driven by interest rates and risk premia.
There are many more interesting findings on how systemic risk factors drive expected returns, also extending to corporate infrastructure in this paper.