The infrastructure asset class is developing a pipeline of opportunities for secondary fund purchases, as evidenced by recent final closings for two funds-of-funds.
The funds, Partners Group Global Infrastructure 2009 and Pantheon Global Infrastructure Fund, each have mandates to invest in secondaries, according to the firms’ websites.
The Partners Group Global Infrastructure 2009, raised by Swiss fund-of-fund manager Partners Group, closed in March on its hard cap €500 million, the firm said in a statement. As of the end of 2010, the fund had already made 17 investments, of which six have been secondary transactions, according to a person familiar with the fund. The fund is considering three more secondary transactions, according to the person.
The Pantheon Global Infrastructure Fund, raised by fund-of-funds manager Pantheon, closed on about $350 million at the end of 2010 and has total investible capital of just over $400 million, according to a market source.
Of the $400 million, Pantheon can invest up to 50 percent, or about $200 million, in secondary investments, according to the source. The fund’s mandate covers both primary deals, such as commitments to infrastructure funds, and secondary purchases of fund interests.
Funds-of-funds like secondaries for the incremental diversification such deals can provide to their portfolio. Few funds-of-funds have built up the capability to source primary and secondary infrastructure deals. The Partners Group and Pantheon funds mark a departure from this.
Both funds launched in 2009, when the infrastructure fundraising market was at its weakest point in years. During that time, limited partners seeking liquidity headed to the secondary market to offload interests in illiquid assets of all stripes. Sensing opportunity, big-ticket private equity houses raised dedicated vehicles to invest in secondaries, the largest of which, Goldman Sachs’ Vintage Fund V, closed on $5.5 billion in April 2009.
But while secondary sales of private equity funds dominated the market through 2010, the sector trend in the secondaries market this year is to “go way beyond buyout and venture”, according to one broker of secondary fund interests. Today, it is not uncommon to see more niche strategies, such as natural resources, energy funds and infrastructure funds go up for sale, the broker said.
Buyers see a diversified group of sellers in the infrastructure sector. Distressed sellers are now a small percentage of the market, according to one source, who also said that many of the fund interests coming to market have large unfunded commitments. Common sellers include banks and insurance companies, which also face regulatory headwinds on both sides of the Atlantic that are likely to make them even bigger sellers in the future.
In the US, the 2010 financial regulatory reform act included the “Volcker Rule” – a provision named after former Federal Reserve Chairman Paul Volcker that limits the amount of capital a bank may invest in its captive funds. Much uncertainty surrounds how the rule will be implemented over time, but it is seen as one potential source of secondary dealflow in the US.
And in the European Union, insurance companies are facing a new set of regulatory requirements called Solvency II, which will require insurers to improve the liquidity of their balance sheets in an effort to make sure they are able to meet their claims. The requirements, due to go into effect at the end of next year, could bring more secondary infrastructure interests to market from insurers seeking to improve the liquidity of their portfolios.
Additionally, more market-makers are stepping into the infrastructure asset class to broker secondary deals between buyers and sellers. For example, London-based specialist private equity and infrastructure advisor Campbell Lutyens is currently brokering a €500 million portfolio of secondary infrastructure fund interests, according to a market source – one of the largest infrastructure portfolios to come to market yet.
John Campbell, senior partner at the firm, declined to comment on the sale. However, speaking at Infrastructure Investor’s Berlin forum this month, Campbell expressed strong optimism about the future of secondaries in infrastructure.
“There is a very clear secondary market available,” Campbell said at the forum.