We examine the impact on the risk profile of wind and solar power investments of the increasing dominance of renewables in the energy mix of a given country, using the case of the UK whose economy has made a rapid transition to renewables and away from coal.

Using asset- and fund-level data, we highlight important differences between infrastructure assets and funds, and compare their historical performance and cash flow characteristics with both public and other private investments. An infrastructure asset’s age, sector, business risk and corporate structure all influence the asset’s risk-return profile. We examine the sensitivity of infrastructure asset and fund performance to public markets by regressing infrastructure returns (at the aggregate, sector and age group level) on public asset market returns.

We then develop a method to estimate infrastructure equity assets’ income returns and cash flows depending on their age and sector. With measures defined that capture both idiosyncratic and time-series income return volatility, we highlight that a CIO cannot ignore the high idiosyncratic risk of infrastructure assets when evaluating their future performance and cash flow risk. To reduce a portfolio’s idiosyncratic income return risk, we find that adding assets from the same sector may be as efficacious as adding the same number of assets from different sectors. We show how many assets are needed before idiosyncratic income return risk starts to level off.

This report, produced in collaboration with Ares Asset Management, illustrates that private infrastructure assets can provide resilience in the current rising rate and high inflation macroeconomic environment. The primary structural reason for this resilience is the ability of private infrastructure assets to increase revenues along with inflation.