Diversification should be a “central aspect” for institutions implementing infrastructure investments, according to a research paper by Swiss consultancy ppcmetrics.

The consultancy said institutional investors – depending on their size, know-how, resources, flexibility and liabilities – should be free to determine which form of infrastructure investment or vehicles best suited their portfolios, but it added that all investors in illiquid asset classes should bear diversification in mind.

It said institutions should not only invest in “defensive” brownfield projects but also add greenfield projects that “offer higher return potential at only slightly increased risk in a portfolio context”.

The ppcmetrics study quoted a 2012 paper by Partners Group Research entitled “Building an Infrastructure Portfolio, which suggests that as much as one-quarter of an infrastructure portfolio should be dedicated to greenfield investments.

An extensive share of infrastructure in an overall portfolio can, however, “make rebalancing difficult”, and in times of crisis the mark-to-model assessment can lead to illiquid asset classes making up too large a share, ppcmetrics warned.

Another aspect of diversification should be regional due to the unique political risks in different countries, it said.

Further, unsystematic risks should be taken into account, which makes diversification across sectors and various single investments “sensible”.

Ppcmetrics argued that, even with securitised infrastructure investments, diversification taking into account ‘vintage years’ – i.e. the duration of an investment – “made sense” in light of economic cycles.

One of the major challenges with infrastructure investments, apart from manager selection and due diligence, is the assessment of performance, the consultancy noted, particularly as there is little historical research on the asset class, and investors are using different benchmarks and performance indicators – “all of which have their pros and cons”.

To determine yield expectations, the consultancy recommended an economic approach based on risk premiums.

A mixture of equities, real estate, private equity and bonds should be taken as a basis for calculations, it said.

It said greenfield investments contained premiums based on equity risk and illiquidity, positioning it “close to private equity”.

Brownfield investments, on the other hand, have a lower risk premium and are more comparable with a defensive equity investment, such as the “shares of a utility company – but with an illiquidity premium”.

But ppcmetrics warned that the increased demand for infrastructure investments would mean that, in future, “yields are likely to get lower”.