Although still a small market in relation to private equity secondaries, infrastructure secondaries have enjoyed a surge in activity.
Data from Infrastructure Investor shows that $5.4 billion had already been raised for infrastructure secondaries funds at the midpoint of this year, illustrating the robustness of investor appetite for the strategy as we emerge from the pandemic – after all, infrastructure secondaries funds raised a record $14.5 billion in commitments in 2020.
We asked secondaries specialist Matthew McPhee, partner at Stafford Infrastructure, to break down the sector’s growing appeal.
How do you see the growth of the infrastructure secondaries space, past and future?
The bedrock of the infrastructure secondaries market growth has been LP transactions, growing in lockstep with the primary fund market. LP secondaries tend to track primary raisings, with a five-year lag. As such, the future of the LP-led market is already written, with 2x growth in transactions likely in the next five years.
More recently, GP-led transactions (such as fund extensions, continuation vehicles and single-asset funds) have seen similar growth drivers. Many of these GPs prefer to retain strong assets as opposed to recycling into the highly competitive direct infrastructure market.
What is the appeal of infrastructure secondaries over primary funds?
Secondaries offer all the key benefits of the asset class, plus fast deployment with high visibility of the underlying assets, a minimal J-curve and an immediate yield. Across each of our infrastructure secondaries funds, we have consistently delivered a total value to paid-in of more than 1x in every quarter.
The high visibility also helps to create a more targeted portfolio construction in terms of sector, vintage or geographic exposure.
Stafford Capital Partners has recently closed its fourth infrastructure secondaries fund. What is the strategy for this fund, and how does it differ from its predecessors?
Our fourth infrastructure secondaries fundraise has attracted many new investors across Europe, North America and Asia-Pacific. This is a follow-on strategy, focused on successful managers and funds that demonstrate infrastructure’s core investment attributes. At the fund’s close, we were close to 70 percent invested. We expect our fifth fund to also be a follow-on strategy when we return to the market in 2023.
Are there any particular infrastructure sectors that stand out for their secondaries opportunities?
In contrast with the uniform targeting of digital infrastructure and energy transition assets, the secondaries markets continue to transact a diverse range of assets along with mature assets. These offer consistent cashflows and attractive inflation-protected revenues in developed markets.