Andrea Echberg: Infrastructure secondaries has ‘come of age’

In January, Pantheon closed its fourth flagship infrastructure program, which has a dedicated focus on infrastructure secondaries, at $5.3 billion. Pantheon Global Infrastructure Fund IV and associated vehicles (PGIF IV) is the largest infrastructure secondaries program the market has seen globally, and the largest ever raised by the firm, which has a 40-year private market track record and complementary strategies across private equity, private credit and real estate.?

Andrea Echberg , Pantheon Partner and Global Head of Infrastructure, says the program’s success is a reflection both of the specific characteristics and benefits of infrastructure as an asset class, especially in an era of higher inflation and rates, as well of the growing maturity and recognition of the infrastructure secondaries market?specifically.?

“Fund IV is where we have seen the market come of age. We have reached a tipping point now where the market is of a scale that it has become a mainstream liquidity tool for investors and managers, and it will continue throughout the cycles to be a more constant market and opportunity,” she says.?

In an exclusive interview with SecondaryLink , which recently named Pantheon ‘Best Infrastructure Buyer of 2023 ’ in its inaugural awards, Echberg delved into the current landscape, discussed Pantheon’s history in infrastructure secondaries and its approach to the space, and shared her views on why the strategy is such a compelling investment avenue for investors.?

How much of the fourth infrastructure secondaries fund has been deployed???

At this point, close to 75% of the fund is committed. The market opportunity is unprecedented; it has really come of age.

We were one of the first movers in infrastructure secondaries back in 2010. Since then, it had been a sporadic market, especially for LP stakes. The market started maturing when we were beginning to raise our Fund IV, driven by the underlying $1 trillion that had been raised across infrastructure primary funds and the related stockpile of unrealized assets. We would expect to see 2% to 3% turnover – that is, the proportion of LP stakes being sold into the secondary market – over the life of each fund, which translates into a significant amount of deal flow. ?

Moreover, when we started raising and investing Fund IV we saw accelerating factors such as the denominator effect, increasing interest rates, inflation and an overall squeeze on liquidity. Those factors have accelerated deal opportunities and created some really attractive pricing dynamics, too.

To put some numbers around these trends, two years ago we did not see any billion-dollar portfolios coming to the market; we saw nine in the last year – and we are seeing large, multi-$100 million portfolios coming to market every couple of weeks. The portfolios coming to the market are very high quality. However, due to the supply-demand imbalance and shortage of scale players in this space, we are able to acquire them at meaningful discounts, which means we can underwrite to really attractive returns.

How is the fundraising environment currently, especially against the backdrop of an increased focus on specialized secondary funds??

We saw incredible momentum in the tail end of the fundraising for Fund IV and that is continuing. Investors are looking to commit to infrastructure secondaries funds, and we have seen a number of new institutions looking to invest in the market. That is not surprising, given the attractiveness of the deal flow and the compelling dynamics around these transactions. ?

We also know that investors are looking for long, proven and realized track records, which is something that we have been able to demonstrate through our 14 years of investing in infrastructure secondaries through the cycles. Additionally, a third of our track record is fully realized, which is really important.??

How are infrastructure funds pricing in the secondary market and do you expect discounts to narrow going forward?

We believe that the majority of the value that you can create through a secondary comes from underwriting the fundamental value within the assets, which is why it is important to have a really specialized team. We have a team of more than 30 professionals with a wide range of direct investing experience, and we have a unique perspective from our $20+ billion platform and relationships with most of the established fund managers across the asset class globally.

Having said that, being in a discount market does boost potential returns and further mitigates the J-curve, which is obviously a key feature of secondaries.?Over the last year, discounts were in the range from high single digits going up to 25%. The average discount at which we purchased portfolios in 2023 was 15%. At the moment, we are not seeing any slowdown in supply, so as long as the supply continues and the demand does not dramatically change, we will continue to see a very attractive pricing market for buyers.??

What is your estimate for infrastructure secondary volume in 2023 and by how much will it grow in 2024??

In 2023, we logged $46 billion of deals in our system, compared to $37 billion in 2022 and $24 billion in 2021. So, our deal flow has almost doubled in the past two years, driven by the LP stakes phenomenon. The market has been growing at a 22% CAGR since 2015, except for 2020 which was impacted by Covid. That trend will continue going forward as the capital raised for infrastructure funds over the last five years continues to churn through the secondary market.??

I don’t know what we will end 2024 at, but we have seen an incredibly strong deal flow in the first quarter, which is normally a quiet quarter, so we anticipate this being a very busy year.

Pantheon was a first mover in infrastructure secondaries nearly 15 years ago – what made you look at the segment???

We started a dedicated infrastructure platform in 2009 and raised our first fund in 2010. By serendipity, this was exactly the time that the infrastructure secondary market started to emerge. It was a clear out from the post-global financial crisis, where a lot of infrastructure funds had not performed as investors expected, and there was distress. We were able to combine Pantheon’s history of investing in private equity secondaries – we’ve been active in that space since 1988 – with our infrastructure expertise to take advantage of this new opportunity.??

At the time, we were able to buy portfolios at very significant discounts, which brought huge benefits to our first fund. As we rolled into Fund II, it also enabled us to have a very niche product. It was really about taking advantage of an opportunity to build on the strength we had in our platform already by bringing together our secondaries and infrastructure experience.??

Fund IV is where we have seen the market come of age. We have reached a tipping point now where the market is of a scale that it has become a mainstream liquidity tool for investors and managers, and it will continue throughout the cycles to be a more constant market and opportunity.?

How does Pantheon approach infrastructure secondary investing? What are you looking for in the deals you do??

We are very much focused on quality. We would rather buy a quality portfolio at a slightly lower discount than looking at a lower-quality portfolio. We are also very focused on understanding the assets, assessing concerns and identifying opportunities for growth. ?

At the moment, with the size of portfolios coming into market, scale is important. So, having a $20+ billion platform and having just raised a $5.3 billion program, we are well placed to put very large tickets down. The number of secondary buyers who can do that is very small; there are probably only three investors can speak to that scale. So, that is a big competitive advantage for us. The other real advantage for us is that we have a very active primary program outside of our secondaries fund and are seen as a friendly investor to a lot of GPs. We don’t have a direct competing program and don't get blocked out of any processes.??

Why should investors consider infrastructure as a portfolio allocation in the current market??

Infrastructure is, generally, a defensive asset class with very strong downside protection and very stable cash flows. Beyond that, what has proven to be especially important over the last couple of years is the hedge against higher inflation and rates.

When we saw the denominator effect and the fall of the public markets, we also saw substantial drops in valuations for most other asset classes. Infrastructure has shown over this period that it can deliver what it was intended to do within client portfolios.

While increasing discount rates due to higher interest rates brings downward pressure on valuations, the positive correlation to inflation for most infrastructure assets due to contracted or index-linked revenues has meant that the asset class has continued to perform incredibly strongly throughout that period of distress, with valuations proving incredibly robust. Given the increasing and still-high interest rates, investors have also benefitted from the fact that most infrastructure assets have very long-term financing structures locked in, which has mitigated impacts of tightening debt markets.??

We are now seeing a lot of investors realizing that given these defensive qualities, infrastructure is an important asset class to have within their portfolio. That has brought more capital coming into the asset class generally.??

What are the benefits of seeking infrastructure exposure via secondaries – both in general, and given prevailing market conditions?

Investing through a secondary fund gives you a number of portfolio benefits. One is that you can get capital to work very quickly and you are mitigating the J-curve. We are buying into portfolios later in their lives, so we don’t have the drag effect of fees being charged while the manager is building up the portfolio and before investors being to see distributions.

Beyond that there are the transparency benefits. We are buying known portfolios of performing assets that have been de-risked, and we can price those appropriately. That also gives us a shorter duration, so we are getting distributions back to investors sooner. That is the word on every investor’s lips: everybody wants liquidity back. Across our last three funds, we have delivered between 13% to 20% in distributions over the course of five years, once the funds are fully invested.

There is also the benefit of diversification, as we’re buying into multiple portfolios of assets and so we are well diversified by manager, sector and geography. There is also the benefit of backward vintage diversification – we are buying into funds closed over a range of vintages; our Fund IV has assets going back to 2012. ?

Given the potential boost to performance from discounts, these duration and diversification benefits really help to provide an attractive opportunity for risk-adjusted returns.