Second helpings

If it’s debatable whether words such as ‘nascent’ and ‘fledgling’ should still be used as descriptions of the infrastructure asset class as a whole, you’d probably meet little resistance when linking them to the infrastructure secondaries market.

After all, while the market is growing, it remains of a modest size: estimates suggest it has quadrupled from a low base of approximately $1 billion worth of deals (with a known seller) in 2010 to around $4 billion last year. Nonetheless, there is no reason to suppose that secondaries will be any less prevalent in the infrastructure space in relative terms than in private equity – and that means a sizeable market is bound to emerge eventually.

Moreover, on the road to maturity, it’s likely that you’ll observe some important landmarks along the way. One of these was apparently spotted by Mark McDonald, director of EMEA and Asia secondary advisory at banking group Credit Suisse, who recently led the secondary sale of interests held by a Japanese pension fund in three infrastructure investment vehicles.

Each of these entities had a different geographic focus but was managed by the same general partner (GP). The sale of interests, which ranged from “fully funded” to “largely unfunded” – and which were bought by three different buyers – had total commitments of several hundred million dollars.

In one sense, the deal’s significance arguably spoke to the evolution of the secondaries market generally – across all alternative asset classes – rather than the infrastructure portion of the alternatives market specifically.

Go back a decade or so and the alternative asset secondary market was much more opaque and there was still some perceived stigma attached to selling. That perception was challenged when large pension funds such as the California Public Employees Retirement System (CalPERS) and sovereign wealth funds like the Abu Dhabi Investment Authority (ADIA) began regularly dipping into the market to rebalance their portfolios – using the secondary market in a much more targeted and efficient manner than previously.

Now, McDonald confidently asserts, “selling has become much more of a strategic decision than a distressed one” and a willingness to use the secondary market regularly has “trickled down to some unexpected sellers”. None more unexpected, it might be suggested, than Japanese pension funds, for which reputation is everything.

“We’ve not advised many sellers like this before, but as we look around, we do see more sellers based in emerging markets such as Asia and the Middle East in particular,” says McDonald.

Interest growing

Within infrastructure specifically, interest is clearly growing – and not just on the sell side. Secondary market buyers traditionally focused on mainstream private equity have seen the market for brand-name GPs mature and become increasingly commoditised. Those in search of differentiation and – arguably – better value, are alighting upon infrastructure, where pricing remains relatively attractive (though not at such a large discount that sellers are deterred from pulling the trigger).

Moreover, because of growing appetite, deals can be swiftly executed – for the transaction described above, Credit Suisse quickly engaged with a deliberately limited number of potential buyers and concluded the transaction within two months.

No surprise perhaps that the likes of Harbourvest Partners and Landmark Partners – stalwarts of the private equity and real estate secondary markets – have made senior real assets hires this year. Or that Pantheon is reported to be well on its way to raising $1 billion for its second infrastructure secondaries fund. The signs are there that the market is making significant headway.