The secondaries industry’s alluring ‘backwater’

Will we start to see more secondaries investors buying and selling infrastructure and real assets fund interests?

For some time now, there’s been talk (from ourselves included) about the secondaries market starting to pick up in alternative asset classes with more nascent primary markets relative to private equity, like infrastructure and real assets. Insiders say such activity really began around 2010, but during the first half of 2014 it was estimated to comprise just 2 percent of overall secondaries market activity, according to Setter.

There have been a few LPs, such as the University of Arizona Foundation and Japan Trustee Services Bank, selling stakes in Macquarie infrastructure funds recently – but such deals still remain relatively rare.

So it was with interest that I noted in Blackstone’s third quarter earnings report this week an item about its secondaries affiliate, Strategic Partners. The firm has a $400 million separate account solely dedicated to infrastructure and real assets secondaries. That presumably includes opportunities in natural resources (particularly in oil and gas), or other subsectors like agriculture, mining and timber.

Does this allocation represent a bigger push into new secondaries territory? Or increased investor demand for such fund interests and assets?

Naturally (ahem), Strategic Partners declined to comment. But it got me thinking more about activity levels and interest in these asset classes.

Aside from the relative immaturity of the primary market, a number of sources told me what’s kept activity minimal are that infrastructure and real asset funds typically present a lower risk/return profile and require a specialist due-diligence skill set, quite different to the buyout funds that dominate secondaries activity. As a result, many buyers and advisors steer clear. Even long-time primary and secondary infrastructure investors like Pantheon – which is raising a dedicated $700 million secondaries fund for the strategy – call the infra secondaries market today a “backwater”.

But that’s exactly what’s appealing about it, says partner Kathryn Leaf Wilmes (who declined to comment on fundraising). “Not many people are aware of it or are focused on it,” she said, estimating there were fewer than 10 dedicated infrastructure/real assets secondaries buyers globally currently enjoying average discounts of 20 percent on some $7 billion to $9 billion estimated worth of sell-side supply based on the underlying primary market.

Pantheon’s secondaries infrastructure deal flow was $1 billion in 2010 and $4 billion last year. And most market insiders expect supply to grow further still as more primary infrastructure and real assets funds – which tend to have longer lives than buyout funds – reach the middle of their investment lives and investors seek liquidity.

If that happens at some scale, then perhaps Leaf Wilmes will be right – “what’s a backwater today, will be mainstream in a few years” – and we’ll see a number of buyers join Strat Partners and Pantheon in earmarking capital for the strategy.

This story has been updated to indicate Strategic Partners’ $400 million to infrastructure and real assets secondaries is separate from Strategic Partners Fund VI. The $400 million is in the form of a separate account.