Quality gap widens in infra secondaries

The split in buyer interest between high quality and lower quality funds has reached the infrastructure market as dealflow in the asset class doubled, according to a report by Partners Group.

“We observe bifurcation in the market, with high-quality funds yielding high transaction prices and lower quality portfolios often unable to attract sufficient buyer interest,” the global investment firm wrote in its Private Markets Navigator Second Half 2016 report, adding that competition among buyers was high.

High quality funds were trading at high prices and lower quality portfolios were often not attracting buyer interest, the report noted.

Sellers’ high pricing expectations has also led to deal volume not growing in line with dealflow, the report noted. Dealflow almost doubled to $9.7 billion last year from $5.6 billion in 2014 for Partners, a spokeswoman for the firm told sister publication Infrastructure Investor. In comparison, deal volume rose 14 percent to $1.6 billion from $1.4 billion across the same period, according to a mid-year report by Setter Capital.

“There are a lot of potential sellers who tap the market and explore conversations who don’t ultimately pull the trigger in that year,” a source who focuses on infrastructure secondaries at a global fund of funds told Secondaries Investor. It can take up to four years for a seller who is interested in parting with their stakes to agree to sell, the source added.

Infrastructure was one of only two strategies that had an increase in deal volume during the first half, rising 40 percent to $860 million, according to Setter’s report. A majority of this involved the APG-led tender offer on Arcus Infrastructure Partners’ 2007-vintage fund, which had generated about €600 million of liquidity for investors as of March, as Secondaries Investor reported.

Acquiring interests in funds fully invested in a portfolio of diversified core infrastructure assets can still offer an attractive risk/return profile, though the upfront return premium for mainstream secondaries over direct investments has largely disappeared, Partners’ report noted.

– Matthieu Favas contributed to this story.