Pricing for European infra secondaries to stabilise

Rising prices in the European infrastructure secondaries market, particularly for mature and brand name funds and assets, have started to stabilise, according to market participants.

The use of intermediaries, coupled with high valuations in the primary market, have contributed to high prices for secondary stakes in the asset class, with some fund interests being sold for up to a 25 percent premium, according to Andrea Echberg, who heads infrastructure investments at Pantheon in London.

“There has been aggressive pricing on the back of rising NAVs and exits substantially above book values,” Echberg told Secondaries Investor. “What we’re starting to see now, in the last couple of processes we’ve been involved in, is that those processes have failed because there’s not sufficient secondary investor appetite at the ask of the seller.”

A second half 2015 report published by Partners Group last week noted that infrastructure secondaries in Europe were achieving high pricing, particularly for later stage fund stakes, reflecting the healthy exit environment and optimistic expectations. As a result, the firm is becoming more cautious about funds most seen on the market, it noted in the report.

Infrastructure secondaries have been priced on average around a 20 percent discount to net asset value (NAV) over the last five years, and most bidders on brand name funds are now seeking prices between a 10 percent discount to a small premium, Echberg said. Other market participants say pricing has been around par to NAV for the last six months.

The entrance of a few new players who are able to bid aggressively in order to fulfill mandates has also contributed to rising prices.

“We’ve seen a couple of new players focusing on infrastructure secondaries and they have been bidding quite aggressively,” Echberg said. “However, they do have relatively limited capital, and what we’ve seen is that once they’ve filled their capacity for a particular fund name, the market becomes a lot less competitive. It’s still not a deep market of buyers.”

Transactions this year have included SL Capital‘s purchase of three stakes in Arcus and Macquarie-managed infrastructure funds from its debut dedicated secondaries infrastructure vehicle, SL Capital Infrastructure Secondary I, which closed this year on an undisclosed sum. In August, the San Bernardino County Employees’ Retirement Association said it had added infrastructure secondaries to its $195 million managed account with Partners Group.

Buyers with dedicated pockets of capital for infrastructure can be more competitive when it comes to pricing, according to Patrick Knechtli, a partner at SL Capital.

“Typically it’s people who have some kind of separate account, separate fund or side pocket defined for infrastructure who are happy to achieve a lower return on the understanding that they’re buying into mature-yielding assets, which is the key attraction of buying infrastructure,” Knechtli said.

Prices in Europe have been higher compared with those in the US as deals tend to be intermediated and the underlying assets often have more embedded value, Echberg said. “Now, when you look at many of the European funds, most of that value has been priced in so it’s going to be difficult to be aggressive.”