Finding value in ‘off the beaten path’ infra secondaries

Infrastructure secondaries were the only asset class that grew by deal volume in the first half of the year, according to a recent report by Evercore. Pantheon‘s Andrea Echberg spoke to sister publication Infrastructure Investor’s Research & Analytics team about the ‘off the beaten path’ opportunities, the dislocated energy market and Brexit.

How is the secondaries market for limited partnership interests?

Dealflow in the global infrastructure market continues to climb, a trend we have watched since 2010 when the market really started to gain traction. At the end of 2015, the volume, as estimated by market intermediaries, was hovering at just below $10 billion, a dramatic ballooning over a 12-month period.

At the moment, we see value particularly in ‘off the beaten path’ opportunities, as well as in the dislocated energy market.

Of course, the explosive growth in the secondaries market is a sign of it attracting more participants. This happened in the infrastructure primary market in 2012 and was one of the drivers for our portfolio tilt towards secondaries where, at that point, the market was considerably less crowded. Avoidance of what we call the ‘crowded core’ has been a key factor for our second vintage fund.

Which strategies does Pantheon’s new programme focus on?

Our most recent global infrastructure fund, which we announced in March last year and closed oversubscribed, has an OECD markets, core and core-plus, secondaries and co-investments focus. We were an early pioneer of infrastructure secondaries – our private equity secondaries franchise was established in 1987 – so it made sense for us to major on secondaries in Pantheon’s second global infrastructure programme.

How will Brexit impact the European infrastructure market?

Post-Brexit, the early sentiment amongst our infrastructure GPs has reaffirmed our view that infrastructure assets are generally expected to continue to perform well based on their long-term predictable cashflows, strong cash yield and in many cases low or no GDP correlation.

We expect the short-term impact of Brexit to be principally influenced by currency volatility – devaluation in sterling and to a lesser degree euro-denominated assets in dollar-denominated vehicles. Projects tend to have limited cross border exposure which reinforces the traditionally defensive nature of the asset class as a whole.

Although it’s still early days, a common response from our GP community is that they expect some attractive opportunities to present themselves. And while the scale of the task ahead for the UK and the EU cannot be underestimated, the fundamentals of the UK and most EU economies remain intact, in their view.

What is your criteria for selecting fund managers, both through secondaries and primary commitments?

Quality and consistent performance. We track managers over a long period of time and price our preferred group at regular intervals, so we are in a good position to spot attractive opportunities when they arise.

We look for a complementary mix of generalist and sector/geographically-focused funds. Our objective is to seek out managers who possess a differentiated investment strategy, backed by a track record of delivering it and of securing deals through bilateral processes over competitive auctions. Our aim is to create diversified portfolios with the potential for strong cash yield as well as growth from core and core-plus strategies.

Andrea Echberg is a partner in Pantheon’s infrastructure and real assets team, based in London. Prior to joining the firm in 2012 she led the infrastructure direct and co-investment teams for Société Générale, Macquarie Capital and ABN AMRO.  She holds a BEng in Mechanical Engineering from Imperial College of Science, Technology and Medicine.