Unlisted Infrastructure: Biases in Appraisal-Based Valuations?

Abstract

Unlisted infrastructure investments are some of the most sought after assets for pension funds, sovereign wealth funds (SWFs) and family offices around the world. The OECD (2016) reports that the world’s largest pension funds allocate as much as 4.6% to as high as 14.7% of their asset allocation to unlisted infrastructure investments. These types of funds represent investors with patient capital as they are interested in the long-term exposures gained from owning unlisted infrastructure assets. What is extraordinary about these long-term asset allocation decisions is the fact that little empirical research exists relating to unlisted infrastructure investments. There are two primary motivators that make unlisted infrastructure attractive from an asset allocation pers-pective. The first rationale from Hartigan et al. (2011) and Newell et al. (2011) is that unlisted infrastructure returns exhibit low correlations with other asset classes. Assets with low correlations deliver portfolio diversification benefits to investors. The second desirable characteris-tic of unlisted infrastructure is its low measured volatility of returns. Studies such as Inderst (2010) suggest that unlisted infrastructure investments exhibit low return volatility in comparison to listed infrastructure, listed property and broad equity returns.