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  1. Finding an adequate proxy of unlisted companies’ market can be difficult, especially if few actual listed proxies exist. 
  2. Using moving averages
    LaTeX Math Inline
    bodyR_f
     and
    LaTeX Math Inline
    bodyERP
     tends to “smooth” returns and produce “stale” valuations that do not reflect current valuation preferences in the reference market and prevent adequate measurement of risk (price variance)
  3. The use of a single risk factor (so-called market risk) to estimate the relevant discount rate implies that all relevant risks found in infrastructure investments are proxied by the stock market. In theory and in empirical tests, this is not a robust assumption.
  4. The choice of market to estimate the implies a significant overlap with the relevant principal market for the unlisted assets so that the risk preferences captured by this aggregate public-market risk premia can be attributed to the potential buyers and sellers of the unlisted asset. However, while many heterogenous buyers and sellers are active in public equity markets, a smaller and more homogenous group of large institutional investors and managers buy and sell unlisted infrastructure companies. As a result, the price of equity risk observed in the US or UK broad equity market may not be considered representative of the risk preferences of institutional investors involved in infrastructure investment.
  5. Additional premia added to the component of the discount rate are typically ad hoc and without much theoretical or empirical support. Moreover, discounts for lack of marketability are not not consistent with IFRS 13, since fair value is measured on the transaction date, presumably after any required marketing period, hence no discount is required to account for the time to execute a transaction. Likewise, the lack of frequent trading is a characteristic of unlisted infrastructure assets that market participants take into account and include in the price they are willing to pay at the date of measurement. (minus) Applying discounts for liquidity is ad hoc and contradicts the notion of fair value under IRFS 13, because it is an inherently subjective consideration when buying or selling a given financial asset at a given point in time and may not reflect the average liquidity premium in the relevant market.

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