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Infrastructure as an asset class has experienced a steady rise of investor interest over the past decade. In particular, pension funds and insurance firms have increased their investments in this alternative asset class. Demand has been driven by their appetite for low-risk returns with little market correlation as well as the desire to match long-term liabilities and to protect against inflation. At the same time, governments around the world, urged by mounting fiscal pressure and the belief in a superior operational performance of private service delivery, have provided a steady supply of assets through initial public offerings, public sales, or public-private partnerships (PPPs). European governments alone have privatized 640 transportation, utility and telecommunication firms between 1980 and 2008, cumulatively worth more than $3 trillion.1 As a consequence, both the numbers of infrastructure funds and listed infrastructure firms skyrocketed. Although only a handful of funds were active in the 1990s, there were 111 infrastructure funds on the road in September 2010 (Orr [2007], Preqin [2010]). Similarly, the number of listed infrastructure firms rose from 216 to 1,136 between 1980 and 2010.
Despite the growing market for private infrastructure investing, the number of empirical studies on the risk characteristics of this new alternative asset class remains limited. As many investors are attracted to the asset class because of its supposedly low risk characteristic, a thorough understanding of the actual risk profile of infrastructure is critical. Even more so, to private investors it is of paramount importance to address the global infrastructure funding gap of $71 trillion until 2030 (OECD [2007]). Besides investors, infrastructure firms, governments, and regulators require a solid understanding of the risk characteristics of those assets that they operate, privatize, or regulate.
In our research we empirically test the widespread belief that infrastructure investments are low risk, both in terms of market and total risk. For our analysis, we use a sample of more than 1,400 listed stocks across all infrastructure sectors: transport, telecommunication, and utilities. Our findings suggest that infrastructure indeed has significantly lower market risk than comparable equities in the MSCI AU Country World Index, confirming its portfolio diversification benefits. Total risk is not lower for infrastructure firms, however, contradicting the general consensus. Hence, infrastructure is characterized...