Infrastructure assets have shown strong growth historically and this is expected to continue, given sectoral themes such as the energy transition and digitalisation, as well as growing interest from investors for the asset class. As a result, we expect part of the asset turnover in the secondaries market to be similar to that in the broader private equity market.
For secondaries buyers, the opportunity set offers immediate diversification (across vintages, sectors, and geographies), quick deployment, a reduced J-Curve and an accelerated distributions profile given typically shorter hold periods compared to primary funds. The market will therefore be attractive for both buyers and sellers over the medium-term.
Below are some of the main tailwinds and headwinds affecting the growth of the market.
Tailwinds
In today’s market, we are seeing a large number of LP-led secondaries driven by the liquidity needs of investors. At the same time, we see many GPs finding it more difficult to exit assets and generate distributions than in the past, which is leading investors to tap the secondaries market in order to generate liquidity.
Rebalancing of GP-led and LP-led deal flow: We think this growth in LP secondaries deal flow may be a medium-term trend. As interest rates decline and GPs start to generate distributions, the secondaries deal flow may rebalance between GP-led and LP-led secondaries in the future. We expect the deal flow drivers to switch from addressing the liquidity requirements of investors to addressing the growth requirements of assets.
Attractive pricing despite rate cuts: Despite the decrease in interest rates, we haven’t seen the impact on LP secondaries pricing yet. We have noticed a growing demand for liquidity for various reasons, such as fund re-ups and portfolio rebalancing, and this is reflected in the attractive pricing seen today.
Infrastructure drivers: We are also seeing growing opportunities in GP-led secondaries, with infrastructure assets in need of growth capital, to capitalise on the energy transition and digitalisation. Secondaries players can offer creative solutions to GPs in order to provide growth capital without compromising on governance, and to allow for future value creation of the assets under the same GP ownership. Some of these opportunities are purely bilateral discussions with GPs. In our view, the key to originate this deal flow is to be seen as a strategic partner by GPs.
Headwinds
Large cap funds / assets: We believe that the M&A market has still not fully recovered yet and GPs are struggling to exit assets given the interest rate environment. Therefore, a key consideration while underwriting secondaries is: ‘How well placed are the GPs to exit their assets in the future?’
In secondaries processes, we typically prefer mid-market assets or funds that are potentially better placed to exit in today’s market, compared to large cap assets or funds. This is reflected in our deal screening and underwriting.
ESG: This aspect is being increasingly scrutinised in our underwriting approach (such as an assets’ exposure to fossil fuels) and we want to behave as a sustainable secondary investor. In particular, we see a lot of processes involving older vintage funds with exposure to fossil fuel assets, such as oil and gas midstream. We view these sectors as unfavourable not only from an ESG perspective but also over the long term in the context of wider energy transition. This is a pivotal part in our deal screening and underwriting approach, as we typically do not pursue processes where there is significant exposure to fossil fuels.
Evergreen secondaries funds: The democratisation of private markets is under way, and we have seen an increasing number of GPs launch evergreen vehicles.
We see this as a growing space, but not as mature as traditional or “close ended” strategies in terms of deployment and performance in secondaries space.
Overall, we believe this a good development for the market to provide access to private markets for retail and private wealth investors.
These vehicles offer similar benefits to investors as traditional secondaries strategies, in terms of portfolio diversification.
As a recent and developing market, we are monitoring the space closely, particularly live secondaries processes, to assess any impact it may have on the overall pricing of secondaries and returns expectations.
For secondaries buyers, the opportunity set offers immediate diversification (across vintages, sectors, and geographies), quick deployment, a reduced J-Curve and an accelerated distributions profile given typically shorter hold periods compared to primary funds. The market will therefore be attractive for both buyers and sellers over the medium-term.
Jean-Pascal Asseman and Faraz Qureshi are head of infrastructure and infrastructure investment executive director, respectively, at AXA IM Prime.