Momentum builds for infrastructure secondaries

Secondaries deal volume in the sector grew by almost a third in H1 compared with a year earlier.

Interest in infrastructure secondaries is growing as investors in traditionally long-held funds chase liquidity and buyers seek exposure to the scarcely-traded asset class.

Infrastructure secondaries transaction volume experienced the biggest growth compared with other sectors in the first half of this year, rising 29 percent to $614 million compared with a year earlier, according to a report by intermediary Setter Capital released on Monday. The volume of private equity secondaries grew by only 2 percent during the same period.

Charles Ford, a lawyer at Hogan Lovells in London who advises on infrastructure investments, said transaction volume was increasing due to factors including high prices for fund interests and investors using the secondaries market as a way to gain exposure to the asset class.

“There’s a market perception of a scarcity of assets coming to market for infrastructure funds to invest in, coupled with a greater allocation to the asset class by LPs,” Ford said. “For those LPs looking to obtain exposure, they have to think of alternative ways to get it and secondaries provide that. If funds are continuing on because some LPs want to stay in, other LPs will still want liquidity opportunities.”

Growing acceptance of the practice by general partners, who must usually give consent for fund interests to be traded, is also driving secondaries volume growth in the sector.

Several private equity firms have launched funds to take advantage of the expanding sector. This year, Edinburgh-based SL Capital Partners, closed its debut infrastructure fund, SL Capital Infrastructure I, which allocates up to 25 percent for opportunistic secondaries investments, Secondaries Investor‘s sister publication Infrastructure Investor reported. The fund was targeting £500 million ($782.1 million; €708.9 million) according to PEI’s Research and Analytics division.

In July, SL Capital bought a stake in a Macquarie-managed European infrastructure fund, and investment manager and advisory firm Stafford Capital Partners had completed investing all of its Stafford Infrastructure Secondaries Fund, a 2012-vintage €66.1 million commingled vehicle, Secondaries Investor reported .

In March, fund of funds manager Pantheon closed its secondaries-focused 2014 global infrastructure programme on over $1 billion. The firm said the fundraising was substantially oversubscribed at the time, and investments are reported to be continuing at a steady pace.

“Commitments to infrastructure funds are generally larger than plain vanilla private equity funds, with some single fund stakes in the multi-hundred millions,” said a principal at a London-based GP that invests in infrastructure secondaries. “A lot of these are from large sovereign wealth funds who may commit $300 million and then want to reduce the size of their stake to $200 million. We are talking about huge commitment sizes.”

Another reason for sales includes banks who may have sold stakes in infrastructure funds to keep in line with capital adequacy requirements, Ford said.