Second chances

Is infrastructure too geared towards long-term holds for a meaningful secondaries market to evolve? There is growing evidence to the contrary

The words “infrastructure” and “secondaries” may appear mutually exclusive to some. After all, infrastructure investment implies buying interests and then holding them for the long term. As one placement agent told us: “It’s such a ‘buy and hold’ strategy, so you won’t ever see infrastructure secondary positions being traded in anything like the volume that you see in private equity. The positions get locked away.” 

There is some support for this view. According to various sources, it would seem that the infrastructure secondaries market – defined here in the private equity sense as the trading of limited partner interests – is currently worth between $1 billion to $2 billion a year. Compared with one estimate that the private equity secondaries market was worth some $24 billion in 2011 (source: Professional Pensions), this seems like small beer. 

On one level, it’s only what you would expect. Infrastructure is a younger – and hence much smaller – asset class than private equity and the figures referred to above may be viewed as a reflection of this. But even this level of activity is meaningful. Switzerland’s Partners Group alone claims to have bought 15 infrastructure secondary positions since 2009, worth around $400 million in total. Moreover, in the March 2012 issue of Infrastructure Investor magazine, you will read about the recent trading of a €500 million secondary infrastructure portfolio. That surely qualifies as beer of the large variety. 

Perhaps more significantly, there are a number of drivers of current and probable future activity which may be expected to accelerate the market’s development. An obvious one is the capital adequacy pressure being applied by regulators to banks (Basel III) and insurance companies (Solvency II) in particular – which mitigates against holding equity investments on their balance sheets. 

But there are other, less obvious, sources of deal flow. Consider, for example, investors which made a move into infrastructure from their private equity allocations prior to the 2008 crash, only to see their capacity to make new investments shrink in the aftermath. Why not free up some capacity by selling infrastructure positions, which were non-core in the first place?

Ponder also the investor whose infrastructure holdings have outperformed their private equity holdings, meaning that the portfolio is overweight in infrastructure exposure and – perversely – some infrastructure positions may need to be divested as a result. 

There is also a trend for limited partners investing in alternative assets to reduce the number of their general partner relationships in order to save time and money otherwise spent on monitoring. Although there appear to have been more examples of this in private equity to date, there’s no reason why it should not also apply to infrastructure. Again, selling positions on the secondary market could make sense in this scenario.  

And then there’s so called 'maturity mismatches' where, for example, a closed-end fund of funds with a lifespan of, say, 10 to 15 years, has exposure to a 25-year infrastructure fund. Here, there’s a clear role for the secondary market in providing the fund of funds with a possible route to liquidity. 

All in all then, there are plenty of reasons why infrastructure secondaries deal flow may pick up speed in the years ahead. There are sceptical views, however, so – apologies for the cliché – only time will tell. 

*Our cover story on secondaries will form part of the March 2012 issue of Infrastructure Investor magazine. You will find out why asset-by-asset valuation in infrastructure is so crucial – and why it’s a buyer’s market in spite of the infrastructure asset class’s generally strong performance.