Institutional portfolio allocations to unlisted, illiquid infrastructure investments (funds & direct asset investments) have increased for their potential diversification and income benefits.  This trend will likely continue as governments encourage institutions to invest for the energy transition and national welfare.  However, as allocations grow, CIOs are confronted with many questions:

• What are the performance and cash flow characteristics of infrastructure investments and how sensitive are they to public equity and debt assets already in my portfolio?
• How do we model infrastructure investment cash flows, by sector and age, and measure their idiosyncratic risk?
• How do we determine the appropriate allocation of illiquid infrastructure investments, given my liquidity risk appetite and allocation to other illiquid assets? 

Using asset-level and fund-level data, we find that infrastructure equity asset price returns and total returns are correlated with public equity total returns.  Consequently, we model infrastructure asset price returns based on their historical performance and correlations with other public asset returns. 

In contrast, infrastructure equity income returns are relatively stable with low correlations with public market returns.  As a result, we model income returns (and cash flows) based on the historical (and idiosyncratic) income generating capacity of the asset, based on sector and age, but not as a function of the public market environment. 

Empirically, we find income returns display “short-term persistence.”  For example, if an asset pays dividends in one period, it will be likely to pay in the following period.  Also, the magnitude of the dividend paid tends to be “sticky” from one period to the next.  Occasional zero income returns are a possibility, even as the asset becomes mature, complicating portfolio liquidity.  We construct an infrastructure asset income return model to reflect such characteristics.