The theory is that it increases the velocity and thus increases exhaust gas scavenging. So there is at least a theoretical benefit to that. I have used wrap many times on pipes that were contained within fairings. I wasn't doing it for engine performance or cool looks. On early BMW R1100RT's the fairing lowers would actually droop from the heat after prolonged idling (traffic jams, etc.). Shoot an exhaust pipe at operating temperature with a heat gun and you will get about 1100 degrees F. Keeping that heat out of the inside of the fairing has to help with local heating. I am planning to wrap the pipes on two bikes in the current queue... A K1100RS and an ST1100. There are a couple of keys to to minimizing the damage. First, I always ceramic coat the pipes inside and out prior to wrapping - even stainless pipes, because they are usually inexpensive rustable 304 grade. Secondly, I make sure that there is no double wrap on the pipes (this means reducing the overlap). Thirdly, I buy the standard thinner wrap instead of the extra super-duper high insulation kind. When you do this, any moisture is expelled by the heat during operation. If the wrap can trap the moisture, it is either spec'ed or installed incorrectly. I think that moisture, as a problem, is over-stated with regards to pipes contained beneath fairings. What DOES end up hotter is the exit gas temperature. I have a friend who melted his left rear turn signal with the hotter exhaust.
Another thing that takes a lot of heat out of the bike (only on fuel injected bikes) is a fuel cooler. The fuel that is bypassed from the end of the fuel rail for pressure control ends up being a continuous heating loop that can eventually boil the fuel in the tank. Most people think that the heat in the tank is conducted from the hot engine below. Some of it is, but a lot of it is from the fuel recirculation loop. In those cases, as I plan on my K1100RS, I route the fuel from the regulator to a radiator in from of the engine radiator and then back to tank.
