Secondaries industry must expand options in longer-term infra market – HarbourVest

The infrastructure secondaries market is likely to end up looking significantly different to its private equity counterpart, Diego Jimenez, principal at HarbourVest Partners told attendees at PEI Group’s Infrastructure Investor Network Global Summit last month.

This is because assets held by infrastructure investors often have longer-term time horizons than those held in a traditional closed end private equity fund, Jimenez said. Furthermore, the large amount of direct investment in the space is made by players who seek to hold assets for the long term, which changes the picture further.

“About 60 percent of infra assets are held by sponsors that are not GPs – so pension funds, insurance companies and direct investors who do not necessarily have a need to sell at one particular point,” Jimenez noted.

The secondaries market needs to start developing vehicles that can provide liquidity for different types of players, he added.

HarbourVest, for example, has an evergreen fund that can provide liquidity to sponsors for a variety of situations, such as needing to sell a strip of an asset that is yielding. At the same time, the secondaries market needs to provide liquidity to a typical 10-year fund.

“There’s going to be more types of liquidity being closed, more types of structures, and I think the structuring piece also becomes very important,” Jimenez added.

Energy and infrastructure assets made up 6 percent of the $113 billion of secondaries deal volume in 2023, second only to buyout assets, according to Evercore’s 2023 Secondary Market Survey.

Buyer appetite for both infrastructure and credit secondaries transactions remained “very strong” last year, though activity was partially limited by lack of supply, according to Greenhill’s 2023 report. Pricing for infrastructure funds excluding energy stakes fell to 93 percent of NAV last year, compared with 97 percent of NAV in 2022.

“Pricing levels continued to soften slightly due to downward pressure from higher interest rates, though this impact was partially offset by the inflation-hedged properties of infrastructure assets,” the report said.

The supply of infrastructure funds on the secondaries market was somewhat subdued in the second half of 2023, the report added. It remained weighted towards lower-risk core-plus and opportunistic funds with long-term contracts and cashflow visibility, which tend to command the strongest buyer appetite and pricing. While there is interest in core funds, the return profile of these vehicles has generally proven too low for buyers to price attractively.

Greenhill’s report also noted that infrastructure secondaries is among the expanding number of standalone strategies coming to market. Infrastructure secondaries funds represented 6 percent of the $117.92 billion raised by secondaries vehicles last year, according to Secondaries Investor data.