Expectation mismatch derails secondaries deals

Sellers are demanding a high price despite a widening quality gap among infrastructure funds, fresh research shows.

The split in buyer interest between high quality and lower quality funds has reached the infrastructure market as dealflow in the asset class doubled, according to a report by Partners Group.

“We observe bifurcation in the market, with high-quality funds yielding high transaction prices and lower quality portfolios often unable to attract sufficient buyer interest,” the global investment firm wrote in its Private Markets Navigator Second Half 2016 report, adding that competition among buyers was high.

Sellers' high pricing expectations has led to deal volume not growing in line with dealflow, the report notes. While the firm screened (CHECK) $9.7 billion across around 100 transactions in the asset class last year, around $1.6 billion closed, according to a mid-year report by Setter Capital. In 2014, Partners screened around $5.6 billion, while around $1.4 billion closed.

Acquiring interests in funds fully invested in a portfolio of diversified core infrastructure assets can still offer an attractive risk/return profile, though the upfront return premium for mainstream secondaries over direct investments has largely disappeared, the report noted.

Infrastructure was one of only two strategies that had an increase in deal volume during the first half, rising 40 percent to $860 million, according to a mid-year report by Setter Capital. The other strategy that rose was venture capital, by 55 percent.

Additional reporting by Matthieu Favas