Anyone for seconds?

It’s a calculated gamble. At what point do you enter a nascent market? Is it perhaps when it’s just about big enough to validate the cost of putting the necessary resource in place; but not so big that everyone is jostling for a slice of the action? But when exactly is that?

These are the questions occupying the minds of those pondering the possibilities of the infrastructure secondaries market. Listen to the handful of firms that have taken a leap of faith into this space – such as Partners Group, Macquarie and Pantheon – and they will speak like true converts.

They will say that the secondary market is a more attractive place today than the primary market. Much has been made of the tendency of some infrastructure funds to over-leverage, to compete hard for ‘safe’ deals (driving down returns in the process) and defying (or, at least, confusing) investors’ understanding of infrastructure by drifting from their investment mandates.

Operating in the secondary market, the true believers will add, can greatly reduce competition (Pantheon claims that around 70 percent of its deal flow is either proprietary or the subject of a ‘limited’ sales process) and offer immediate cash yield, greatly reducing or even eliminating the J-curve. Furthermore, added to an existing primary portfolio, it provides a diversification element.

There’s little to argue with here. But to cut to the heart of the matter by inverting a familiar expression: It may be clever, but is it big? Pantheon estimates that just over $1.0 billion of deals were done in the infrastructure secondary market in 2010 (where there was a known seller) and that this is expected to rise to around $4.0 billion for full-year 2013.

On the basis that other comparable asset classes, such as private equity, have shown a fairly consistent rotation of 2-5 percent of primary assets into the secondary market each year, the above numbers can be expected to keep rising in line with the continuing growth of the infrastructure primary market.

Still, compared with the $26 billion of private equity secondaries reported to have been transacted in 2012 according to advisory firm Triago, the current numbers for infrastructure look less than exciting. Those currently in the market say they can operate comfortably in this environment because they are only investing small ticket sizes. And this provides a big part of the explanation as to why the large, established private equity and real estate secondary investors have – up to now – tended to give infrastructure no more than a cursory glance.

But there is now talk that one or two of these larger players are preparing to make their moves, thus seizing first-mover advantage (or close to it) while it’s still available. Perhaps these firms have realised that they need to build and develop relationships with infrastructure fund managers first before they can transact on anything more than an opportunistic basis.

Others will continue to wait their turn. It’s all in the timing – and getting the timing right can be a very tricky business.

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