The infrastructure secondaries market may be a nascent one but it clearly has entered a robust ramp-up phase: according to industry estimates, secondaries deal flow quadrupled to $4 billion in the three years to 2013.
This dynamic should be sustained over the course of this year, reckons Sunaina Sinha, managing partner at London-based placement agent and secondary market advisor Cebile Capital. “As more and more infrastructure funds have been raised, more limited partners (LPs) will find reasons to come to the market and sell secondaries pieces.”
Not that such sales will be motivated by investors’ need to raise capital, she says. “There are very little liquidity reasons for secondaries sellers to come to the market today. No one is struggling for cash. The ones that are selling do so because they need to rebalance their portfolio or have fallen out of love with their general partners (GPs).”
Buyers, on the other hand, remain a rather tight club of about 10 active participants. Sinha says these are led by Swiss-based Pantheon, which is currently aiming to raise €700 million for a dedicated fund, and Blackrock Strategic Partners, targeting $400 million for a similar pool of capital. Others manage dedicated accounts for some of their LPs (New York-based Stepstone has such a mandate from San Diego City Employees Retirement System, for instance).
Given that the current supply of deals is thought to amount to between $7 billion and $9 billion, buyers seem to enjoy a privileged position – and are able to ask for attractive pricing. Sinha thinks discounts to net asset value will continue to hover around 20 percent in the near future, which she says is “compelling” compared to the mainstream private equity market.
And while the buyers’ club is undoubtedly expanding, she doesn’t think the supply/demand ratio is about to tilt the other way. “Not all LPs can price infrastructure secondaries deal flow. You need sector-specific knowledge and sector-specific people, so those with dedicated people and vehicles are winning most of the deals,” she argues.
“Over time the supply/demand imbalance will reduce, but it won’t happen overnight. It’s not a 2015 thing.”