Infrastructure secondaries picking up

As some LPs divest disappointing infra investments, others are looking to the secondaries market for easy-to-understand opportunities without construction risks.

The secondaries market for infrastructure is growing, fuelled in part by the disposal of pre-credit crunch private equity fund stakes and assets that have left investors disappointed.

“Some of these funds have underwhelmed,” said Andrea Echberg, London-based partner and infrastructure specialist at fund of funds Pantheon. She notes that in some cases such funds are currently achieving unexciting net returns of 4 to 6 percent, “which was not quite what infrastructure fund investors had signed up for”.

Advantageous pricing is also attracting investors to the secondaries market for infrastructure. “The primary market is crowded – particularly in core infrastructure, where there is a lot of investor capital,” she says. “It’s difficult to find value, because of the supply and demand dynamic that flows from that.”

By contrast, she continued, it’s possible to purchase stakes on the secondaries market at a discount of around 20 percent to net asset value (NAV) because of a relative paucity of investors.

A New York-based secondaries specialist concurred that 20 percent discounts to NAV were available if the infrastructure funds on offer included assets that “did not live up to investors’ expectations”.

Most of those problematic investments were made in the years immediately before the credit crunch, he added. “Investors buying into a toll road, in the expectation that income would grow at 3 to 5 percent, in line with nominal GDP, suddenly saw this growth disappear – wiping out massive amounts of equity value.”

Insiders are predicting that increasing supply on the infrastructure secondaries market will be matched by increasing demand. “There’s a wall of capital from pension funds, sovereign wealth funds and insurers looking for easy-to-understand brownfield infrastructure without construction risks,” says Tara Davies, head of infrastructure mergers & acquisitions at Macquarie Group in London. “On the other side, infrastructure assets are scarce by nature, but we are beginning to see dealflow from the older investment banking-led infrastructure funds which are nearing the end of their fund life.”

Infrastructure funds run raised by groups including Goldman Sachs, Morgan Stanley and JPMorgan are said to be among those with tail-end positions that would be ripe for secondaries investment.

This activity is not expected to be anywhere close to that being seen in the private equity end of the secondaries market, insiders caution, as the primary market for infrastructure is still relatively young. “The allocations of LPs to infrastructure haven’t yet reached their targets because infrastructure is still growing as an asset class,” said Yaron Zafir, head of secondaries at London-based advisory and placement firm Rede Partners. This reduces the need for them to dispose of assets, he said.

Still, infrastructure secondaries are gaining ground – last year advisory group Setter Capital said there had been roughly $700 million-worth of infrastructure fund stakes sold, equivalent to just under 2 percent of total secondaries activity across asset classes.

Pantheon’s Echberg says the volume of infrastructure secondaries deals Pantheon has reviewed has quadrupled since 2010 to more than $4 billion-worth last year. “Based on the first quarter of this year, I think we will exceed this in 2014,” she said.

Reporting by David Turner