The infrastructure secondaries industry remains nascent. Infrastructure Investor’s LP Perspectives 2022 Study shows that less than a quarter of LPs plan to commit to secondaries funds targeting the asset class over the next 12 months, compared with more than half in private equity. Meanwhile, less than 10 percent of investors plan to sell stakes in the secondaries market – unsurprising, given the pervasive under-allocation.
“Most investors are in a phase where they are trying to grow and build out their infrastructure exposure,” says Brent Burnett, co-head of real assets at Hamilton Lane. “Because of that, you don’t get a lot of portfolio rebalancing trade. In private equity, institutions may have hundreds of relationships and be looking to streamline, or else may be over-allocated in certain areas. But, broadly speaking, the same dynamics are not true within infrastructure and so the LP-led secondaries market remains a lot thinner.”
Burnett adds that the LP-led market is also highly competitive, with positions frequently trading at premiums to NAV: “Where trades do happen, they are usually priced at par, or par plus 1 or 2 percent. To be able to transact in that market, you really have to believe in the growth profile of those assets and, frequently, you also have to have access to a line of credit that allows you to augment those returns.”
Tavneet Bakshi, partner and head of EMEA at FIRSTavenue, predicts an increase in secondaries volume in the asset class. There are a number of long-tenor vehicles with current or upcoming structured liquidity breaks in the form of highly managed secondaries processes. “Over and above that, there have been some portfolios that have suffered through overexposure to certain sectors during covid and there may be some investors that are looking for secondaries solutions as a result.”
Bigger and bigger
Gordon Bajnai, head of global infrastructure at Campbell Lutyens, also believes that momentum is building in the infrastructure secondaries market, adding that this is a boon to the infrastructure industry 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.”
Indeed, a deal is currently underway involving what appears to be the largest infrastructure portfolio to trade on the secondaries market. Ardian is believed to be the frontrunner in a bid to acquire around $1.5 billion of infrastructure interests from Northwestern Mutual. Prior to this, the largest infrastructure LP-led deal involved a $1 billion portfolio sold to Strategic Partners by Alaska Permanent Fund in 2020.
The GP-led secondaries market has also taken off for infrastructure. “The biggest growth we have seen over the past year has been on the GP-led side,” says Burnett. “GPs are increasingly looking to those deals to provide liquidity or extend the life of an asset.”
“The secondaries market offers tailored solutions to a whole host of different problems,” adds Bajnai. “Continuation funds, for example, allow GPs to extend the life of assets that don’t fit neatly within a typical fund life. Equally, there are often situations where a value-add investment is de-risked over a number of years.
“Another set of LPs can then come in and hold that asset as a core investment. The secondaries market facilitates all of that and has really changed the whole industry. It has made infrastructure liquid and dynamic to the benefit of both LPs and GPs.”
According to Bajnai, however, the majority of capital funding infrastructure secondaries transactions still comes from traditional institutional investors, rather than secondaries specialists. But that could be changing. There is evidence of a proliferation of dedicated infrastructure secondaries funds.
Blackstone Strategic Partners, for example, raised $3.75 billion for its infrastructure secondaries fund in 2020, and major fundraising successes continued into 2021. Landmark Partners held a final close at $915 million, while Stafford Capital Partners raised €450 million. Macquarie Infrastructure and Real Assets is also busy building a secondaries investment team with a series of big-name hires.
Fundraising activity is particularly prevalent in the GP-led space. “That includes direct infrastructure investors launching new vehicles targeting those GP-led deals,” says Burnett. “That new capital formation is definitely happening in the expectation that this GP-led market will continue to grow.”
Brookfield, for example, is in the process of launching an infrastructure secondaries fund. The firm will primarily focus on GP-leds, while opportunistically pursuing LP investments.