Why do you use the approach that you do for asset pricing?

Answer

Too few comparable private infrastructure equity or debt transactions are available to make direct inferences from observable prices. However, the risk premium or spread implied by observable prices can be broken down into a set of risk factor prices that explain the variance of risk premia and of transaction values in the market. These factor prices can then be used to price other assets (that did not trade) but are exposed to the same risks.

This approach relies on arbitrage pricing theory i.e., markets price risks across assets given each asset’s exposure to these risks. We use it to model the market-implied infrastructure equity risk premia as well as the credit spread of different types of infrastructure debt instruments.