Recent years have seen a string of well-known managers launch big-ticket secondaries processes. Yet, considering that the asset class accounted for around 10 percent of all funds that changed hands on the secondaries market last year, large infrastructure deal volume has been lumpy, to say the least.
That was until last June, when Canadian insurer Manulife Financial closed the largest stapled deal and perhaps – depending on your definition – the largest secondaries deal to take place in North America this year. The deal resulted in the creation of a $2 billion fund and marked the entry of Manulife’s infrastructure investment team into the world of third-party asset management.
The Boston-headquartered team, part of US subsidiary John Hancock, had been investing in North American assets for nearly two decades using the account of its parent company. It had built up a $5 billion portfolio – $3 billion of which was in direct investments and $2 billion in funds.
Of the six alternative asset classes in which Manulife invests, as of spring 2017 infrastructure was the only one that had not been opened to outside investors. According to John Anderson, John Hancock’s head of North American bond investing, this is partly because infrastructure assets are perfect for underpinning life insurance policies and it didn’t make sense to shrink the available pool of assets by dishing them out to others. As the infrastructure portfolio grew, however, it reached a tipping point.
“We had shown Manulife a couple of opportunities where we were targeting $250 million but could do $400 million if you want,” Anderson told Secondaries Investor. “The top of the house said, ‘I love the deal but I don’t have the capacity to do more’. It became clear that if we had external investors who could speak for larger pieces of transactions, we could bring more opportunities for Manulife and would have more influence to shape the transaction how we liked.”
Assets in the shop window
The firm decided to bring in third-party investors around June last year. It searched for placement agents through the autumn and by September had hired Campbell Lutyens. From its experience as a fund investor, the Manulife infrastructure team was drawn to the idea of seeding the new fund first. “It’s not just someone saying ‘here’s what we’re going to try and find for you’ but ‘we have examples right here’,” Anderson said.
Campbell Lutyens proposed a two-stage process. First, the firm would find a secondaries buyer that could underwrite the transfer of a portfolio of infrastructure assets off Manulife’s balance sheet and into a new fund. Then, having accounted for that buyer’s commitment to the new vehicle, they would syndicate the remainder of the fund to new investors.
Initially, a portfolio of seven companies from John Hancock’s balance sheet was sliced more or less in half, with one portion remaining and the other used to seed the new fund. Then competition was opened up to a secondaries buyer who could underwrite a large chunk of the assets and, as lead buyer, write a sizeable ticket.
“The most important thing was that bidders accept that we will transfer the seed assets at Manulife’s current carrying value: we ‘re not going to mark them up, we’re not going to take a discount,” Anderson said. “If you think you can support that, it’s item number one. We think our fees, expenses and carry are low end of the market. If you agree on the first two things, let us know what you can do [in terms of underwriting].”
In the end, Ardian emerged as the buyer, offering to underwrite $1 billion of the portfolio. After a period of negotiation, this portfolio increased in size to 11 positions, pushing the proportion of seed assets up to around 60 percent of the fund’s size. Although the figure was not disclosed, Secondaries Investor understands that Ardian invested around one-quarter of the capital and syndicated the remainder.
Share the wealth
Once the seed assets were in place, the remaining $1 billion of the fund was opened up to syndication through a process that ran from March to June. It was agreed that Ardian would be the only secondaries investor in the new vehicle, known as John Hancock Infrastructure Fund, since Manulife wanted to attract investors that could make primary commitments for future funds.
By number, the majority of investors were European, with North Americans representing the largest proportion by value. “Three or four great investors” from East Asia made up the difference, Anderson noted. Secondaries Investor understands that syndication was more than 1.5x times oversubscribed, with 23 individual names buying.
Does the transaction represent a turning point for infrastructure secondaries? According to Thomas Liaudet, a partner at Campbell Lutyens, the deal illustrates the possibilities that secondaries can offer to large scale asset holders and managers.
“One way to look at it is that the parent does not have to either ‘just sell’ assets or ‘just let’ the team spin-out,” Liaudet said. “This transaction evidences again that there is a third way, combining both of two worlds: use parents’ assets strategically and retain investment talent in-house.”
The growth of open-ended infrastructure vehicles could reduce the need for LP liquidity processes. At the same time, proof of concept can open doors in the secondaries world. The John Hancock, Campbell Lutyens and Ardian deal may do just that.