Perspectives: Secondaries poised for growth

A number of investors are already rumoured to be preparing to shed parts of their portfolios and the market could reach $10bn by 2023.

For private markets secondaries fundraising, 2020 was the biggest year on record. Ardian raised $19 billion for its record-breaking global fund, while Blackstone raised $3.75 billion for Strategic Partners Infrastructure III, the biggest vehicle ever raised exclusively for infrastructure secondaries deals, and closed the largest ever infrastructure secondaries transaction, acquiring a $1 billion portfolio from Alaska Permanent Fund.

Yet just 17 percent of LPs expect to make commitments to infrastructure secondaries funds in the 12 months to September 2021 and only 7 percent of LPs expect to both buy and sell on the secondaries market, while 80 percent expect to do neither.

But as primary infrastructure fundraising continues to remain strong, the growth of a secondaries market seems inevitable. And there are several other fundamental drivers too. As new investors continue to seek exposure to the asset class, the secondaries market can provide an efficient access point, mitigating the J-curve effect by allowing LPs to buy into portfolios with assets already on the ground. There is also a fundamental mismatch between the longer-holding periods associated with infrastructure and some of the early investors in the asset class. Given the quality of infrastructure assets in many portfolios, GPs and LPs would often like to extend their hold. But that creates a misalignment with LPs that want or require liquidity.

Long-term theme

“Generally, we believe secondaries represents a growth market,” says Partners Group’s head of business development private infrastructure, Vittorio Lacagnina. “The market has been growing at around 13 percent CAGR for the last five years and if this continues it would result in a 2023 market size of $10 billion for traditional infrastructure secondaries and an additional $2 billion-$2.5 billion of complex or non-traditional deals such as concentrated restructurings, GP-led continuation vehicles and portfolio sales.

“The main driver is the substantial pick-up in infrastructure primary fundraising, which will result in a larger secondaries supply with around a three- to five-year lag. At the same time, the growing stock of mature funds supports a growing supply of large, complex transactions. In our secondary dealflow, the average age of restructured funds was between eight and nine years, meaning that the recent primary fundraising growth has not yet trickled down to non-traditional secondary volumes. We expect that growth in primary fundraising will lead to more restructurings in the long run.”

It’s also possible that the covid crisis will lead to a spike in secondaries activity further down the line. “The uncertain economic environment should be affecting the valuation of all but the most resilient assets, but managers have been relatively slow to adjust their valuation assumptions and parameters,” explains InfraRed Capital Partners’ head of investor relations, Sandra Lowe. “This is likely to create a disconnect between the valuation ascribed by vendors and potential purchasers. This will evolve as the rate of actual economic recovery becomes clearer.”

Threadmark’s co-founder Bruce Chapman agrees. “No one is going to sell until valuations have been adjusted and no one is going to buy at historic valuations. But we’re already aware of at least one or two investors planning to shed significant portions of their portfolio.”