The infrastructure secondaries industry continues to evolve, with 30 percent of respondents to affiliate title Infrastructure Investor’s LP Perspectives 2024 Study believing that the current environment will provide attractive opportunities to buy – the highest figure ever recorded.

“As the infrastructure asset class matures, it is natural and necessary to have a functioning secondary market,” says Michael Bane, head of US investor relations at Ardian. “There are a few dynamics at play: a maturing market, the denominator effect and the growing use of the secondary market as a portfolio management tool, all of which means 2024 will be a record year for infrastructure secondaries.

“The constraining force in this market is not dealflow, but rather the capitalisation of secondary buyers. It remains a buyer-friendly market given these favourable supply/demand dynamics.”

Gordon Bajnai, global head of infrastructure at Campbell Lutyens, adds: “Many LPs are considering the benefits of investing through the secondaries market, particularly in this environment. It is the fastest growing segment, with LP portfolio sales almost tripling this year, driven by the liquidity needs of large institutional investors.

“We have also seen a significant surge in infrastructure secondaries specialist funds. Around eight out of 10 of the largest secondaries managers now have infrastructure-focused pockets or dedicated funds.”

“Around eight out of 10 of the largest secondaries managers now have infrastructure focused pockets or dedicated funds”

Gordon Bajnai,
Campbell Lutyens

Of respondents to Infrastructure Investor‘s latest survey, 30 percent are planning to make commitments to secondaries funds over the next year. “HarbourVest, Ardian and Brookfield all have dedicated secondaries funds to name but a few,” says Monument Group partner Bart Molloy. “There has certainly been an uptick in interest over the past couple of years and we expect to see even more going forward.”

Furthermore, secondaries pricing has been unusually attractive, given not only increased volume in the market, but also the higher cost of the line of credit facilities that many of the large secondaries buyers use.

“A year and a half ago, those credit facilities had a much longer duration and were available at rates of between 2.5 percent and 3.5 percent. It made a lot of sense to use those facilities to pay full prices on acquisitions and then grow the portfolio for two years before reconciling that equity,” says Michael Dean, managing director at HarbourVest Partners.

“Today, the cost of those credit facilities is approaching or even exceeding the carry cost of that equity and the duration has also come in. We are therefore not seeing the same kind of aggressive buying that was made possible through the use of those lines. Instead, we are seeing more asset-level, bottom-up underwriting and that has improved the pricing dynamic for buyers.

“It was not uncommon for quality infrastructure portfolios to trade at above par valuations. Today, we are seeing high-quality LP portfolios clearing at 90-92 percent.  While we are not seeing the 20 percent discounts that can be obtained for some private equity portfolios, the overall pricing dynamics for diversified, performing infrastructure positions has improved.”

GP-led secondaries

In addition to the growth of the LP-led secondaries market in infrastructure, GP-led secondaries are also booming, particularly given challenges in traditional exit markets. “GP-led continuation vehicles represent an alternative and legitimate exit or partial exit for LPs, creating much-needed liquidity,” says Bajnai.

“Increasingly, GP-leds are the first choice for managers when it comes to their very best businesses, and continuation vehicles are taking market share from M&A”

Michael Dean,
HarbourVest

“GPs are tapping into GP-leds with increasing frequency in order to drive early liquidity or to access growth capital for deals that may be only part way through their business execution plan,” says Brent Burnett, head of real assets at Hamilton Lane. “Five years ago, these deals tended to involve assets out of the junk drawer – deals where there just wasn’t a third-party market. Now that is rarely the case.”

Dean agrees. “Five years ago, most of these deals had some degree of fixing required – an issue that needed solving at a portfolio level. The asset itself could be good, but there might be a bad capital structure, for example, poor timing or problems with alignment.

“Increasingly, GP-leds are the first choice for managers when it comes to their very best businesses and continuation vehicles are taking market share from M&A. GPs are using this technology to play offence, trying to hold on to their best assets, turning winners into even bigger winners.”