The secondaries market of tomorrow for infra investment

Mark Benedetti and Vladimir Colas, the co-heads of Ardian US, explain what is fuelling the surge of interest in infrastructure secondaries.

Infrastructure investment has grown steadily over the years. But from 2015 to 2020, GPs raised a record-breaking $514 billion in infrastructure primary capital, representing a 2.5x growth in volume over the previous five-year period.

Every primary market needs a secondary marketplace, and infrastructure is no different. The consistent growth in yesterday’s primary infrastructure fundraising numbers is driving the burgeoning secondaries infrastructure dealflow of today. Historically, around 2 percent of the primary capital raised annually made its way to the secondaries marketplace.

On this calculation, it is conceivable that infrastructure secondaries will reach nearly $10 billion, and could be as high as $15 billion, by 2023.

Here are three of the key factors that make this an attractive market for buyers today.

Limited buyers

Infrastructure secondaries is still a relatively niche market and, despite growing volumes from both LP sellers and GP-led transactions, there remain only a few dedicated buyers and even fewer of scale. When Ardian entered the market in 2013-14, a $200 million transaction was considered very large.

Mark Benedetti
Mark Benedetti

As the infrastructure market has grown, so too has the size of secondaries transactions, which can now exceed $1 billion – offering a competitive advantage to the buyers that can execute on the larger, more complex deals.

Yield enhancement

Many infrastructure allocators invest in the asset class to generate recurring yield. However, it often takes a primary fund three to five years to ramp up to its targeted yield. With secondaries, we are investing in mature portfolios that generate yield from day one. Furthermore, the potential to acquire assets at a discount or to use a deferred payment structure may allow for the mechanical enhancement of the yield derived from the acquired portfolio.

Traditional secondaries benefits

Vladimir Colas
Vladimir Colas

Infrastructure secondaries offer all the traditional benefits of secondaries investing, including J-curve mitigation, reduced blind pool risk (which is particularly helpful for assessing greenfield projects), earlier liquidity, discounted acquisitions and diversification.

“Infrastructure secondaries dealflow presents significant opportunity ahead”

For a long time, secondaries were considered a niche segment of private markets. Today, they are a core component of many investors’ allocation strategies. Infrastructure assets lend themselves well to the secondaries market, and they are experiencing a growth trajectory that mirrors what private equity secondaries went through 15 years ago.

Of course, there will always be factors that impact the market in the short term, such as what we have been experiencing during the pandemic. We saw a temporary decline in dealflow activity during the first couple of quarters of 2020 due to covid. However, deal activity came roaring back at the end of the year, resulting in the unprecedented growth we are seeing today.

This is a stable, resilient asset class offering an attractive choice for buyers. Overall, infrastructure secondaries dealflow is not only here to stay – it presents significant opportunity ahead.

Mark Benedetti and Vladimir Colas are co-heads of Ardian US. Benedetti joined the firm in 2006 from KPMG while Colas joined in 2003, having begun his career at a French startup active in the entertainment sector. Both are members of the executive committee.