Infra secondaries come of age

A proliferation in specialist funds and an increase in LP- and GP-led dealflow all point to the maturation of the infrastructure secondaries industry.

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Just over one-quarter of respondents to Infrastructure Investor’s LP Perspectives Study 2023 plan to invest in infrastructure secondaries funds during the next 12 months, as investors react to a busy year for secondaries fundraising. 

Most notably, Ardian has overtaken Blackstone Strategic Partners by raising the largest ever infrastructure secondaries fund. The firm hit its $5.25 billion hard-cap after nine months in the market in April 2022. The fund is said to have been significantly oversubscribed and is three times the size of its predecessor.

Meanwhile, 2022 saw a number of infrastructure secondaries fundraising debuts. Goldman Sachs Asset Management, for example, raised just above $125 million. And Hamilton Lane exceeded its $500 million target for an inaugural fund focused on both infrastructure secondaries and co-investment.

Brookfield Asset Management also announced it was planning to accept outside capital for its new infrastructure secondaries strategy, and Macquarie Asset Management has been rapidly building out its infrastructure secondaries team, having lured Strategic Partners’ executive Wandy Hoh to lead the charge.

This flurry of activity reflects the growing maturation of an infrastructure secondaries industry that has previously been dominated by individual institutional investors with limited involvement from specialist funds.

GP-led secondaries

The infrastructure secondaries market has historically been heavily weighted towards GP-led transactions. As a young asset class, most institutions have been in build-out mode and LP sellers have been few and far between.

“This is a very young fund market and so it is rare to find investors selling fund positions. Secondaries players have therefore needed to be creative about the situations they get involved in, and that has led to significant activity around continuation vehicles,” says Bruce Chapman, co-founder of Threadmark.

GP-led dealflow remains strong and is in fact likely to increase as GPs grapple with the challenges of the current economic environment. “GP-led secondaries can be used as tool to solve many problems,” says Gordon Bajnai, partner at Campbell Lutyens. “For example, as blind pool fundraising becomes more challenging, GPs can consider bringing new money into a mature portfolio via an annex fund. That way, they can continue investing while they wait for the primary fundraising market to improve.”

GP-led transactions could also be viewed particularly favourably in a period of increased uncertainty. “Investors like the idea that the manager already knows the asset, so the feeling is that there will be less surprises,” says Bart Molloy, partner at Monument Group. 

“Infrastructure secondaries are still predominantly GP-led, and we are seeing a lot more single asset syndication and roll-over vehicles,” agrees head of real assets investments at Hamilton Lane, Brent Burnett. “In fact, GPs today are viewing the secondaries market as a viable liquidity option for early monetisation from the outset and are underwriting the partial sale of assets into their base case.”

LP-led secondaries

However, there are indications that LP-led secondaries volume is also growing. Fourteen percent of survey respondents said they envisioned themselves as sellers this year, while a quarter of survey respondents said they plan to buy secondaries stakes.

Molloy says this is partly because  LPs are increasingly viewing the secondaries market as an effective portfolio management tool, while from a buyer’s point of view, these deals offer effective modification of the J-curve and immediate diversification, both useful characteristics for investors looking to build up exposure to the asset class. “I think dealflow will continue to be strong,” Molloy says. “Particularly in an environment where active portfolio management is going to be more important than ever.”

Burnett observes that liquidity pressures are also driving transactions. “There has been an uptick in LP stake secondaries sales in recent months, driven by the need to monetise private markets positions as a result of the denominator effect,” he explains. 

In this respect, the secondaries market is more sensitive to public market swings than primary fundraising, explains Bajnai, who adds that the sudden increase in LP sellers on the market as a result of liquidity constraints has led to temporary periods of price dislocation. 

“The UK pension funds, in particular, faced a very difficult few weeks last autumn, and that had a short-term impact on valuations,” he says. “Some very good-quality funds that would typically have priced at a premium, changed hands at a discount.”

Burnett, however, says that any valuation modifications have, to date, been muted. “Volumes have increased, but interestingly pricing has only softened marginally. Eighteen months ago, LP interests were trading at par or a premium. Now it may be possible to get a very slight discount, depending on the portfolio. But there certainly hasn’t been any massive dislocation or reset in pricing expectations so far.”

What is clear is that infrastructure secondaries volume is only going to grow and Bajnai says that will create further interest in the asset class as a whole. “We are seeing huge growth in the infrastructure secondaries market, and that is making the asset class even more attractive to investors,” he says. 

“Some investors have historically been put off by the perceived illiquidity of these long-term assets. But the secondaries market now allows investors to realise investments when they want to and to actively manage their portfolios.”