Infrastructure secondaries: an open-ended question

Does the projected growth in open-ended infrastructure funds spell the end for infra secondaries?

When Blackstone raises its giant infrastructure fund – it intends to collect $15 billion before the year is out – it will do so using an open-ended fund structure.

This, say sources, is a sign of things to come. The market for private infrastructure investment took its first steps using the closed-ended 10-year private equity-style fund model but has since started looking for other models that are better suited to a strategy where the underlying assets are typically lower-risk than buyouts and have a yield component.

“It is only a natural evolution of the market that people would like the open-ended structure and move to it over time,” Mark Canavan, senior portfolio manager for the New Mexico Educational Retirement Board told sister publication Infrastructure Investor in September.

As the first wave of infrastructure funds modelled on the private equity structure came to the end of their lives a few years ago with unsold assets, there was a slew of secondaries transactions. The asset class now accounts for a small but meaningful chunk of the market: 7 percent of total transactions, or $3.8 billion, in 2017, according to recent figures from advisory firm Evercore. It has nearly doubled in the last two years.

But will the movement towards open-ended funds, which offer investors liquidity through redemption periods, choke off this budding infrastructure secondaries market?

Not necessarily; the redemption process can be difficult. Liquidity is usually generated not by selling assets but by bringing new investors into the fund, which isn’t always guaranteed, so a secondaries sale may be a better option. These open-ended deals may be less suited to traditional secondaries buyers, whose own 10-year fund structures and risk appetite applies better to private equity, but there is no reason why pension funds or other institutions with the investment capability would not want to participate.

Furthermore, while there may be a movement towards open-ended funds, closed-ended vehicles remain the most popular structures. According to a recent investor survey conducted by placement firm Probitas Partners, 22 percent of respondents expressed an active interest in open-ended infrastructure funds, compared with 67 percent for closed-ended funds. That institutional demand for closed-ended funds will feed through into the secondaries market years down the line.

The infrastructure secondaries opportunity is here to stay.

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