Partners: look beyond brand-name funds in infra secondaries

Brandon Prater and Patrizia Buser, of Partners Group, tell investors where to find sustainable returns in today’s fiercely competitive landscape.

Historically low base rates, moderate growth and low inflation at best have been dominating the macroeconomic picture in many developed markets in recent years. In this environment, appetite for infrastructure assets has been rising continuously as investors increasingly value the asset class for its stable cashflows and inherent protection against future inflation.

This has attracted capital to the sector and, in combination with the high availability of debt financing, has allowed asset valuations to surge.

Competition is also increasing in the market for infrastructure secondaries, with ever more participants entering the space, willing to pay high prices. The focus of most market participants remains on acquiring established brand-name infrastructure funds, where bidders are now seeking prices from a single-digit discount to a small premium.

This environment is testing investment discipline and, as such, we think investors should be cautious on mature assets, especially in Europe, where high valuations imply low returns going forward. Inflection assets are more attractive, especially in North America, where funds can benefit from dislocation in the energy space. Furthermore, we see an opportunity to take advantage of non-traditional situations, such as portfolio restructurings.

An increasing number of managers are considering term extensions of their more difficult vintage funds, such as 2007-vintage funds, in order to gain more time to sell off their remaining portfolio assets.

These so-called tail-end liquidity solutions represent a growing segment of the market and are an attractive investment opportunity for flexible and experienced investors, as the long-term nature of many of these offerings limits their suitability for smaller and less experienced infrastructure secondaries investors.

Brandon Prater is co-head of private infrastructure, while Patrizia Buser is investor relations, private infrastructure, both at Partners Group. This article is an edited extract from Partners Group’s H1 2016 Private Markets Navigator and appears in sister publication Infrastructure Investor‘s April issue.