In this article, Frédéric Blanc-Brude, Director of EDHEC Infra and Private Assets, explains why the Capital Asset Pricing Model (CAPM), although ‘one of the founding frameworks of modern finance’, is very inadequate for determining the net asset value (NAV) of unlisted infrastructure.

Indeed, when reporting the NAV of unlisted assets like infrastructure using discounted cashflows, best practice consists of deriving a discount rate from an asset pricing model. However, the asset pricing model used, which is typically the CAPM, is unable to explain historic equity returns. Research has shown instead that multiple factors simultaneously explain the returns of financial assets, but only if data from the right market is used.

Leveraging the power of better models than the CAPM and machine learning, it is possible to capture the factors (the multiple betas) that drive infrastructure market prices, enabling the NAV of infrastructure investments to be estimated in practically real time, also known as ‘nowcasting’.

Read the full article here.