What is considered a secondaries deal? It’s a question that may sound bizarre coming from Secondaries Investor, an Infrastructure Investor affiliate publication dedicated to the secondaries market for alternative assets. And yet it’s one we asked ourselves last week, after an intriguing transaction landed on our desk.
In August, Brookfield Asset Management, along with Oaktree Capital Management, acquired 100 percent of a privately held convertible preferred security in EnLink Midstream, a natural gas transmission company owned by infrastructure giant Global Infrastructure Partners. EnLink provides transportation and processing services for natural gas, natural gas liquids and crude oil across Oklahoma, Texas and Louisiana, according to a document about the deal.
The transaction was worth $841 million, is understood to have priced at a discount and was backed using capital from Brookfield’s infrastructure secondaries strategy.
Brookfield and Oaktree acquired the convertible preferred stock on a 50:50 basis from TPG and Goldman Sachs, which had invested in the security in 2016 via their funds. Brookfield plans to back leverage about half of its portion, meaning the equity cheque it wrote is just over $200 million.
To be sure, acquiring shares in a listed company is not exactly the private equity secondaries market’s bread and butter. But in the world of infrastructure, the parameters around what’s considered a secondaries deal are slightly more permissive.
“In infrastructure we can sometimes think of the primary deal as the moment the green field is turned into an airport, and you bring everybody in. Anything post-that can sometimes be thought of as a secondary,” says a lawyer who advises clients on infrastructure secondaries deals. According to him, deals like EnLink are not uncommon in the direct secondary infrastructure universe – nor will they be as people look to more interesting ways to find yield. Whether a firm decides to structure it so it can go into their main infrastructure bucket, infrastructure debt bucket or infrastructure secondaries bucket depends on how they view the yield drivers of their programmes and what opportunities are available.
By imaginative use of the secondary opportunity, Brookfield appears to have found the yield opportunity without having to deal with the complications of a full acquisition.
For Brookfield – which is building its infra secondaries team and over the summer hired Hamish Kidd, who has experience at Rothschild and Macquarie, to lead its Americas effort and Keshav Bhojania in London to lead things in EMEA – this latest deal isn’t the typical type of transaction it plans to back via its strategy. John Stinebaugh, the managing partner who oversees the firm’s infrastructure debt and infra secondaries businesses, tells Secondaries Investor it mainly plans to work directly with GPs on sponsor-led deals and to structure tailored offerings for sponsors and originate investments.
Still, the deal did tick many of the boxes of what Brookfield’s infrastructure secondaries unit is trying to accomplish. Whereas the firm’s flagship infrastructure fund focuses on control investment, its secondaries programme is a non-control strategy that backs sponsors. With EnLink, Brookfield and Oaktree are acquiring a non-control investment in the form of preferred stock and are backing the sponsor, GIP, through providing liquidity to two other investors.
A key differentiator in this deal lies in the exit route. Unlike backing a fund restructuring and becoming an LP in a continuation vehicle, Brookfield and Oaktree can sell the preferred equity stock as they like – provided they find a buyer. It’s also a convertible preferred security, so in the event of a change of control, for example, the stock could be converted to equity and exited.
Another key factor to consider is that the investment isn’t structured in a fund – a key element of most secondaries transactions.
Secondaries deals can, by and large, be characterised as passive equity ownership where alignment and pricing on the way in are key. Brookfield’s deal shows that opportunities that fit those wide parameters – regardless of whether they’re in a fund structure – are increasingly becoming bread and butter for some.
Adam Le is senior editor, EMEA at Private Equity International. Write to him: firstname.lastname@example.org