The Rise and Promise of Infrastructure Secondaries

Infrastructure secondaries, once a niche area of the investment landscape, have steadily gained prominence in recent years, driven by growing investor interest and a robust market environment. The market for infrastructure secondaries has witnessed notable expansion, reflecting the broader trend of increased secondary market activity across various asset classes. According to Global Infrastructure Hub’s report, secondary private investment in infrastructure projects increased by 16% in 2022 to USD1 trillion over 1,892 transactions. The value of all secondary investments made in infrastructure projects in 2019 has increased by 73% from its pre-pandemic level.

This heightened activity underscores the growing recognition of infrastructure assets as an attractive investment proposition, particularly in the secondary market context. If the market for infrastructure secondaries attains a similar percentage to the market for private equity secondaries, it may grow by more than eight times. The main driver of this expansion is the LPs’ constant need for liquidity across economic cycles.

Pantheon in its research report further explains that the secondary investors engage in the infrastructure market through two primary avenues, LP-stake transactions and GP-led secondaries. In LP-stake portfolio secondary investments, investors achieve quick diversification by purchasing interests in established LP portfolios. This method allows access to more mature investments and reduces the uncertainties linked to blind pool investments. Secondary investors buy into an LP portfolio based on a valuation derived from future cash flow projections. This strategy offers exposure to a diverse range of assets without needing to commit to a new fund.

GP-led transactions allow secondary investors to access specific assets or concentrated portfolios via various structures. These deals enable investments without needing majority ownership premiums and help mitigate risks associated with new investors in change of control scenarios.

Additionally, in GP-led transactions, secondary buyers may offer unfunded capital to support the assets, enabling further investments in value-enhancing opportunities or de-risked development projects. This aspect can be particularly attractive to GPs who seek to avoid cross-fund investments and have fully deployed older vintage funds. By providing capital for add-on investments or de-risking initiatives, secondary buyers can enhance the appeal of these transactions for both GPs and investors.

Drivers of Growth and Investor Appetite

Several factors have contributed to the intensified interest in infrastructure secondaries. Firstly, the inherent appeal of infrastructure assets, characterized by long-term, stable cash flows and inflation-hedging qualities, has resonated with institutional investors seeking to diversify their portfolios. With the persistent low yield environment and heightened market volatility, infrastructure assets, which often exhibit defensive characteristics, have emerged as a compelling investment avenue.

Moreover, the growing maturity of infrastructure funds has spurred a wave of fund restructuring and portfolio rebalancing, serving as a catalyst for heightened secondary market activity. Investors, including pension funds and sovereign wealth funds, are increasingly capitalizing on the potential for acquiring established infrastructure assets through the secondary market, targeting value enhancement and diversification benefits.

Challenges and Opportunities in the Current Environment

The evolving landscape of infrastructure secondaries presents both challenges and opportunities for market participants. One key challenge lies in accessing high-quality infrastructure assets, particularly as competition intensifies and pricing becomes more competitive. Additionally, the complexity and illiquidity inherent in infrastructure investments necessitate a careful and diligent assessment of risk factors, operational performance, and market dynamics.

However, these challenges are counterbalanced by compelling opportunities. The demand for infrastructure assets, from both traditional and non-traditional investors, continues to fuel the market, fostering a robust environment for secondary transactions. In addition, the evolution of infrastructure secondaries platforms and the increasing participation of specialized secondary fund managers have created new avenues for investors to access diversified and well-structured infrastructure portfolios, enhancing the overall attractiveness of this segment.

The latest data underscore the resilience and performance potential of infrastructure secondaries. A recent study by Cambridge Associates revealed that infrastructure investments, particularly those accessed through the secondary market, have showcased favorable risk-adjusted returns and income-generating capabilities. Furthermore, the durability of cash flows from core infrastructure assets has positioned them as valuable contributors to investor portfolios, particularly amidst macroeconomic uncertainties and market disruptions.

Moreover, the data indicates a sustained appetite for infrastructure secondaries among institutional investors, as evidenced by an increase in fundraising activities and commitments to dedicated infrastructure secondary funds. The prevailing low interest rate environment and the quest for yield have further propelled investor demand for infrastructure exposure, with secondaries serving as an effective means of accessing established and diversified infrastructure portfolios.

Future Outlook and Emerging Trends

Looking ahead, the potential of infrastructure secondaries appears promising, underpinned by various emerging trends and market developments. The integration of ESG considerations within infrastructure investing, encompassing sustainability, climate resilience, and social impact, is anticipated to shape the evolution of infrastructure secondaries, aligning with global efforts towards sustainable and responsible investing.

Additionally, as the infrastructure asset class continues to expand and diversify, with advancements in renewable energy, digital infrastructure, and transportation, opportunities for secondary transactions are expected to broaden. The convergence of technology and infrastructure, such as the digitalization of assets and smart infrastructure solutions, presents novel avenues for value creation within the secondary market context.

In conclusion, the rise of infrastructure secondaries represents a compelling facet of the alternative investment landscape, supported by robust investor appetite, favorable performance trends, and evolving market dynamics. With the latest data and sources underscoring the growth and potential of infrastructure secondaries, investors, fund managers, and industry stakeholders are well-positioned to capitalize on the opportunities within this dynamic and evolving segment.