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A New Approach to Cost of Equity for Private Infrastructure

Author

Listed:
  • Baumgürtner, C. L.
  • Prieto, J. C.
  • Hepburn, C.
  • Ritz, R. A.

Abstract

What rate of return is needed to compensate investors in an infrastructure project? This question is central to the delivery of future investment into sectors like energy, water and transport. CAPM is often difficult to implement for unlisted green-field investments, and its assumptions sit uneasily with the infrastructure context. In this paper, we present a new simple model - the Infrastructure Risk Pricing Model (IRPM)—which better reflects real-world practice and also prices idiosyncratic risk. We show how IRPM can perform better than CAPM in estimating investor hurdle rates, especially for concentrated funds. To illustrate, we argue that IRPM rationalizes investor behaviour in Sizewell C, a recent large, government-backed UK nuclear energy project.

Suggested Citation

  • Baumgürtner, C. L. & Prieto, J. C. & Hepburn, C. & Ritz, R. A., 2026. "A New Approach to Cost of Equity for Private Infrastructure," Cambridge Working Papers in Economics 2671, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2671
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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