With time still left on the clock, 2018 has already become the biggest fundraising year on record for infrastructure, we reported last month. “It’s only logical that the secondary market, which is a derivative of the primary market – is going to continue to grow as well,” Gerald Cooper, a partner focused on the secondary advisory practice in the US at Campbell Lutyens, told Infrastructure Investor in a recent interview.
Primary vehicles fuelling secondaries transactions has already become evident as infrastructure funds that reached the end of their investment lifecycle in recent years have led to a total secondaries transaction value of $18 billion since 2011, according to the placement agent’s estimates. Last year alone accounted for approximately $6 billion of that total.
But it is not just the growing primary market that will contribute to secondaries’ growth.
“We think the market is only going to get larger from here, partly because there is this phenomenon of 2006-08 vintage funds that are still sitting around with, in many cases, good assets, but also because of a natural mismatch in terms of the longer holding periods associated with infrastructure and some of the early investors in the asset class,” Cooper said.
“Generally speaking, there is not an unlimited quantity of good infrastructure assets out there, particularly in North America. And so, we’re finding that GPs and some LPs do want to hold on to assets longer,” he continued. “But that creates a misalignment between LPs that want or need liquidity and those that don’t need liquidity and want to stay invested in an asset that is providing an attractive IRR. It’s a really interesting dynamic that we believe will create a sizeable market opportunity for GP-led secondary transactions.”
According to Campbell Lutyens’ estimates, there is roughly $12.3 billion that is currently available for the purchase of infrastructure secondary investments.
Another factor that Cooper believes will contribute to the growth of the secondaries market is its ability to provide investors another entry point into the asset class.
“Secondaries are an efficient way by which to access exposure [to infrastructure] because you don’t have the J-curve effect. When you’re investing in a primary fund, you have to wait until that capital gets called by the GP for it to be invested – it can take up to four years for an LP’s commitment to be fully deployed,” Cooper noted.
“But, in a secondary fund, you’re buying a portfolio of assets that are already in the ground, so you’re putting capital to work much quicker. And, theoretically, you’re getting that capital back much quicker as well.”
Of the roughly $6 billion estimated in secondaries transaction value in 2017, about 75 percent was GP-led transactions, Cooper said. Asked whether LPs are happy to go along with GP-led initiatives, Cooper responded: “It depends on pricing. In most of these infrastructure, GP-led transactions the pricing has been pretty strong. So, you’ve had anywhere from two-thirds to 75 percent of the LPs taking advantage of the liquidity, with the remainder rolling over into a vehicle that allows them to maintain exposure.”
From a GP perspective, these transactions allow the fund manager to hold on to assets, that in most instances are healthy and generate stable cash flows, when a good exit opportunity is not available. “So, the GP wants to hold these assets, to implement strategic change and exit when they can get a price that reflects maximum value,” Cooper said.