Why the time is now for Infrastructure Secondaries

Market-driven, GP-driven and LP-driven

The infrastructure asset class represents a deep and diverse global investment opportunity, driven by long-term secular trends that are shaping industry and capital markets. Secondaries are the fastest growing sub-segment within infrastructure, posting a 54% average annual growth rate over the past 5 years (Source: Preqin, 2022).

Secondaries today are accelerated by the primary funds of yesterday, which in aggregate have raised more than $800bn over the past 10 years (Source: Preqin, 2022). As these funds mature, and the number of infrastructure sponsors (GPs or ‘general partners’) and investors (LPs or ‘limited partners’) grow, they form a diverse base for secondary transaction activity. In essence, secondaries growth is market-driven, GP-driven and LP-driven.

Win-win-win

Secondaries provide a wide range of benefits for GPs, buyers and sellers that extends beyond simply creating liquidity in the asset class. Through the secondary market, GPs are able to more flexibly manage liquidity on behalf of their LPs, fund growth equity for their portfolio companies and build structured solutions to extend the duration of their existing investments. These non-traditional GP-led secondaries, including continuation vehicles, have been expanding in recent years providing another avenue for investors to put capital to work through typically mature, stabilized infrastructure portfolios and companies. LPs today benefit from a deeper and more liquid secondaries market to manage liquidity, portfolio vintage rebalancing, asset allocation and tail-end liquidation of funds and assets.

Unique, all-weather portfolio benefits

Secondaries have the potential to enhance the overall portfolio for buyers through a number of key benefits. Secondary transactions provide more immediate and visible deployment into typically mature, operating portfolios, helping to accelerate NAV build-up. Portfolios of secondaries deliver greater diversification by vintage, with the potential to therefore reduce volatility in outcome. These more mature portfolios deliver greater upfront yield and offer shorter duration exposure, typically with earlier return of capital.

Adding the infrastructure edge

Further to the traditional benefits of secondaries, infrastructure assets typically benefit from high barriers to entry or monopolistic characteristics, a mixture of contracted and/or regulated cash flows, high operating intensity and implicit or explicit inflation linkage. As a result, infrastructure assets typically demonstrate resilience and downside protection across cycles. The essential services they provide are typically remunerated by contracted cash flow, providing a higher portion of total return through ongoing yield.

Attractive inflection point today

The confluence of these trends has created an attractive inflection point for infrastructure secondaries today, a sophisticated, multi-faceted opportunity set with execution complexity across traditional LP-led & non-traditional GP-led transactions. Investors equipped with the origination and underwriting engine to tackle this complexity have the potential to generate attractive risk-adjusted returns. 

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