Search

Search
Home / Insights
 Strategy insights​

Infrastructure secondaries:
Riding the tailwinds

March 20, 2024 | 6 min read

Private infrastructure has amassed over $1 trillion in AUM in its relatively short history since the 1990s when private capital stepped in to fill government funding gaps and meet the broader trends of privatization.1 As many of the long-term assets for these essential services mature and approach the end of their closed-end fund life, infrastructure secondaries are coming of age with an increasing number of GPs turning to secondaries to extend the ownership of their high-quality assets for further development.  For LPs facing lower distributions through much of 2022 and 2023, secondaries are offering an efficient solution for generating liquidity and/or rebalancing portfolios.

Infrastructure secondary volumes are rapidly growing but at the same time facing a shortage of infrastructure secondary capital. Given the current market dynamics, infrastructure secondary buyers have the opportunity to select from a growing pool of high-quality investments at favorable pricing and terms that are not trading in the traditional M&A market. For infrastructure investors not currently investing in secondaries this means potentially missing out on a wide swath of high-quality transactions that are no longer available through the direct infrastructure market. In this paper, we explore the growth and pricing trends that are taking shape across the infrastructure secondary market and the additive role these transactions can play in an infrastructure portfolio.

A deeper dive into infrastructure secondary growth

While still a nascent asset class relative to private equity secondaries, infrastructure secondaries are nearing an inflection point, growing at a 24.9% CAGR from 2015 – 2023, compared to a 7.1% CAGR for the infrastructure M&A market.2  With a record $15 billion of infrastructure secondaries closed or in the market in 2023, forecasts are projecting the market could reach more than $27 billion by 2027.3

Historical and projected infrastructure secondary volumes

Source: Campbell Lutyens H2 2023 Infrastructure Market Report.

Since 2010, ~$20 billion of capital has been raised for secondary infrastructure funds, representing only ~2% of total infrastructure capital raised.4 When comparing capital overhang ratios, the infrastructure secondaries market remains relatively inefficient with unlevered infrastructure secondary dry powder representing only 0.7x of the annual infrastructure transaction volume.5

Infrastructure secondary capital overhang ratio

Source: Preqin & Campbell Lutyens H2 2023 Infrastructure Market Report. Capital overhang represents capital raised but not yet invested.

Infrastructure secondary pricing: Resilient but with buying opportunities

In the more volatile market backdrop over the last several years, infrastructure secondary pricing has broadly remained close to par or maintained single or low double-digit discounts. In particular, high-quality portfolios with large, diversified, well-known, blue-chip managers have tended to trade with narrower discounts as the underlying asset valuations are better known within the market. There is, however, more information asymmetry with respect to mid-market infrastructure funds, particularly when bottom-up underwriting is applied and GP valuation policies are taken into account, which can lead to advantageous pricing for secondary buyers. Additionally, given the limited supply of infrastructure secondary capital, secondary investors are often using deferrals, which can help improve headline pricing while also allowing secondary investors to deploy larger tickets using recycled capital.  

In 2023 and 2024, there has been a notable softening in pricing. With higher interest rates and an increased cost of debt, there has been a concurrent higher cost associated with credit facility transactions that are often used by infrastructure secondary buyers. As the cost of those credit facilities approaches the cost of equity, there has been less aggressive pricing than was previously made possible using those lines, creating widening discounts for secondary buyers.

Open Popup

Infrastructure secondary pricing

Source: Campbell Lutyens H2 2023 Infrastructure Market Report. Reflective of Campbell Lutyens market pricing received and transacted as of August 2023.

GP-led continuation vehicles in infrastructure

With economic uncertainty and an anemic M&A market persisting into 2024, there are fewer traditional exit routes for GPs and their portfolio companies. In 2022 and 2023, GP-led secondaries represented 68% and 56%, respectively, of infrastructure secondaries market volume.6 GP-led continuation vehicles have provided an efficient liquidity solution for GPs to extend the runway for some of their highest quality assets while also helping solve for some of their most timely issues, including capturing additional growth, maximizing exit options, aligning duration with shareholders, and raising additional capital for acquisitions or organic growth.

Assets that have transitioned risk profiles are another use case for GP-led continuation vehicles, and often these types of assets are only accessible through infrastructure secondary investments. For example, managers may target a value-add risk infrastructure profile on a development asset, however, once the development is complete and the asset is operational and transitioned to a core or core plus risk profile, it no longer fits the targeted risk profile. A GP-led continuation vehicle allows LPs that want to maintain exposure to the existing asset the opportunity to do so while offering other LPs the option to exit.

LP-led transactions in infrastructure

LP-led transactions are also playing a growing role in the infrastructure secondary market, particularly for institutions impacted by lower distributions throughout 2022 and 2023. LP-led secondaries have provided an important liquidity lever to help many LPs address overallocation challenges and create much needed capacity for new investments. Because infrastructure valuations have been relatively resilient, it is more attractive for investment committees to sell infrastructure portfolios with durable valuations than other asset classes they hold which may require significant discounts to offload in the secondary market. Many investors are also turning to the infrastructure LP-led secondary market to de-risk mature programs, whether that is to seek liquidity and engage in active portfolio management or to divest from non-core relationships and reduce administrative burden. Read more HarbourVest insights on the private equity LP-led secondary market.

Michael Dean

Managing Director,
Infrastructure and real assets

Abigail Rayner

Principal,
Infrastructure and real assets

GP-led infrastructure secondary volumes

GP-led infrastructure secondary volumes​

LP-led infrastructure secondary volumes

LP-led infrastructure secondary volumes​

Source: Campbell Lutyens H2 2023 Infrastructure Market Report.

The role of secondaries in an infrastructure portfolio

Private equity investors have long relied on secondaries to achieve diversification, create enhanced liquidity, and provide differentiated access to top tier funds and GPs, but this practice is a more recent trend among infrastructure investors. Investing in infrastructure through the secondaries market can bring several distinct benefits to investors when constructing an infrastructure portfolio, including:

Opportunity to invest in assets at discounts to net asset value (NAV) that can drive rapid uplift
Acquiring investments through secondaries at a discount to underlying NAV can drive immediate uplift which is further enhanced by portfolio appreciation that occurs between the last reporting date and the transaction close — a gap which can often take 6-12+ months.

Illustrative infrastructure secondary uplift and returns over time Infra Secondaries Chart 6

Source: HarbourVest, For illustrative purposes only. Past performance is not a reliable indicator of future results.
Differentiated, less competitive access relative to direct infrastructure

When investing in infrastructure assets directly, many investors are often bidding on the same asset in a competitive M&A market. By investing in secondaries, investors have the opportunity to obtain similar diversified exposure but through differentiated sourcing, along with the opportunity to invest at a discount to NAV.

Shorter duration and accelerated cash distributions

Infrastructure secondary funds generally represent well-established limited partnership interests that are typically between 60-90% funded. Based on the seasoned nature of the assets, an infrastructure secondary transaction can begin generating cash distributions as early as day one of an investment.

Lower return dispersion based on the seasoned nature of assets

Secondary funds buy seasoned assets with an existing GP, which can limit the change of control and blind pool risks of direct investing. As a result, secondary funds can offer a narrower and more consistent band of returns compared to direct fund investments.

J-curve mitigation

Unlike direct infrastructure funds where the IRR can be low or negative in the early years of a fund’s life, secondary funds can offer the potential for high initial IRRs driven by purchasing limited partnerships at a discount. Early high IRRs combined with early distributions typically mitigate the J-curve in secondary transactions.

Multi-asset secondaries offer diversification

Multi-asset secondaries or LP-led transactions provide investors the ability to achieve diversified access to a broad range of infrastructure assets across sectors, geographies, managers, and vintage years, which can help mitigate point-in-time risk.

Strong liquidity and self-funding profile

Given the early distributions from infrastructure secondary investments, an investor is likely to only have 60-70% net out of pocket exposure (net capital calls as a percentage of limited partners’ commitments). Factors contributing to this include distributions offsetting early contributions and the use of deferral payments.

Infrastructure secondary funds generally represent well-established limited partnership interests that are typically between 60-90% funded. Based on the seasoned nature of the assets, an infrastructure secondary transaction can begin generating cash distributions as early as day one of an investment.

Lower return dispersion based on the seasoned nature of assets

Secondary funds buy seasoned assets with an existing GP, which can limit the change of control and blind pool risks of direct investing. As a result, secondary funds can offer a narrower and more consistent band of returns compared to direct fund investments.

J-curve mitigation

Unlike direct infrastructure funds where the IRR is low or negative in the early years of a fund’s life, secondary funds can offer the potential for high initial IRRs driven by purchasing limited partnerships at a discount. Early high IRRs combined with early distributions typically mitigate the J-curve in secondary transactions.

Multi asset secondaries offer diversification

Multi-asset secondaries or LP-led transactions provide investors the ability to achieve diversified access to a broad range of infrastructure assets across sectors, geographies, managers, and vintage years, which can help mitigate point-in-time risk.

Strong liquidity and self-funding profile

Given the early distributions from infrastructure secondary investments, an investor is likely to only have 60-70% net out of pocket exposure (net capital calls as a percentage of limited partners’ commitments). Factors contributing to this include distributions offsetting early contributions and the use of deferral payments.

Key takeaways

Investors are increasingly allocating to infrastructure secondaries as they seek the benefits of diversification, favorable cash flow characteristics, compelling risk adjusted returns, and J-curve mitigation. Infrastructure secondary investments can play a valuable role in both nascent and mature portfolios alike.

    • Infrastructure secondary volumes are projected to rise rapidly, benefiting from strong secular tailwinds and a maturation of the asset class.
    • Infrastructure secondaries provide investors the opportunity to gain access to marquee assets that are not available in the M&A market along with the opportunity to quickly scale a diversified infrastructure allocation at favorable pricing and terms.
    • The shortage of secondary capital has created a tremendous opportunity for infrastructure secondary buyers to acquire high-quality and de-risked investments at a discount to fair value.

Would you like to discuss infrastructure secondaries and the developing role they can play in a portfolio?

Contact us
Footnotes
  1. Preqin 2024 Global Infrastructure Report.
  2. Source: Inframation –Infrastructure M&A transaction; Campbell Lutyens – Infrastructure Secondary Volume.
  3. Source: Campbell Lutyens H2 2023 Infrastructure Market Report. Assumes a 1.7% average turnover of secondaries to infrastructure AUM.
  4. Preqin, 2023 Preqin Global Infrastructure Report.
  5.  Campbell Lutyens H2 2023 Infrastructure Market Report and Preqin. Based on dry powder and near-term fundraising as reported by Preqin as of June 2023 relative to average annual deal volume from 2018-2023F. Levered assumes 20% leverage ratio on dry powder. For example, if just 2% of total infrastructure AUM (~$27 billion) were to seek liquidity in the secondary market, there is a clear shortage of capital with just $10.6 billion of dry powder available for investing.
  6. Campbell Lutyens H2 2023 Infrastructure Market Report.
  7. HarbourVest, based on analysis of private equity secondary and private equity 2000-2019 vintage funds from Preqin’s 2,000+ private equity funds which includes 193 private equity secondary funds.
Disclosure

HarbourVest Partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes and should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy.  The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here.  This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.   

More HarbourVest insights

View all insights

Professional Investor Definition

“Professional Investor” under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) and its subsidiary legislation) means:

(a) any recognised exchange company, recognised clearing house, recognised exchange controller or recognised investor compensation company, or any person authorised to provide automated trading services under section 95(2) of the SFO;

(b) any intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong;

(c) any authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(d) any insurer authorized under the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong), or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong;

(e) any scheme which-

(i) is a collective investment scheme authorised under section 104 of the SFO; or

(ii) is similarly constituted under the law of any place outside Hong Kong and, if it is regulated under the law of such place, is permitted to be operated under the law of such place,

or any person by whom any such scheme is operated;

(f) any registered scheme as defined in section 2(1) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong), or its constituent fund as defined in section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A of the Laws of Hong Kong), or any person who, in relation to any such registered scheme, is an approved trustee or service provider as defined in section 2(1) of that Ordinance or who is an investment manager of any such registered scheme or constituent fund;

(g) any scheme which-

(i) is a registered scheme as defined in section 2(1) of the Occupational Retirement Schemes Ordinance (Cap. 426 of the Laws of Hong Kong); or

(ii) is an offshore scheme as defined in section 2(1) of that Ordinance and, if it is regulated under the law of the place in which it is domiciled, is permitted to be operated under the law of such place,

or any person who, in relation to any such scheme, is an administrator as defined in section 2(1) of that Ordinance;

(h) any government (other than a municipal government authority), any institution which performs the functions of a central bank, or any multilateral agency;

(i) except for the purposes of Schedule 5 to the SFO, any corporation which is-

(i) a wholly owned subsidiary of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(ii) a holding company which holds all the issued share capital of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong; or

(iii) any other wholly owned subsidiary of a holding company referred to in subparagraph (ii); or

(j) any person of a class which is prescribed by rules made under section 397 of the SFO for the purposes of this paragraph as within the meaning of this definition for the purposes of the provisions of the SFO, or to the extent that it is prescribed by rules so made as within the meaning of this definition for the purposes of any provision of the SFO.

The first of such classes of additional “professional investor”, under the Securities and Futures (Professional Investor) Rules (Cap. 571D of the Laws of Hong Kong), are:

(k) any trust corporation (registered under Part VIII of the Trustee Ordinance (Cap. 29 of the Laws of Hong Kong) or the equivalent overseas) having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40 million or its equivalent in any foreign currency at the relevant date (see below) or-

(i) as stated in the most recent audited financial statement prepared-

(A) in respect of the trust corporation; and

(B) within 16 months before the relevant date;

(ii) as ascertained by referring to one or more audited financial statements, each being the most recent audited financial statement, prepared-

(A) in respect of the trust or any of the trust; and

(B) within 16 months before the relevant date; or

(iii) as ascertained by referring to one or more custodian (see below) statements issued to the trust corporation-

(A) in respect of the trust or any of the trusts; and

(B) within 12 months before the relevant date;

(l) any individual, either alone or with any of his associates (the spouse or any child) on a joint account, having a portfolio (see below) of not less than HK$8 million or its equivalent in any foreign currency at the relevant date or-

(i) as stated in a certificate issued by an auditor or a certified public accountant of the individual within 12 months before the relevant date; or

(ii)  as ascertained by referring to one or more custodian statements issued to the individual (either alone or with the associate) within 12 months before the relevant date;

(m) any corporation or partnership having-

(i) a portfolio of not less than HK$8 million or its equivalent in any foreign currency; or

(ii) total assets of not less than HK$40 million or its equivalent in any foreign currency, at the relevant date, or as ascertained by referring to-

(iii) the most recent audited financial statement prepared-

(A) in respect of the corporation or partnership (as the case may be); and

(B) within 16 months before the relevant date; or

(iv) one or more custodian statements issued to the corporation or partnership (as the case may be) within 12 months before the relevant date; and

(n) any corporation the sole business of which is to hold investments and which at the relevant date is wholly owned by any one or more of the following persons-

(i) a trust corporation that falls within the description in paragraph (k);

(ii) an individual who, either alone or with any of his or her associates on a joint account, falls within the description in paragraph (k);

(iii) a corporation that falls within the description in paragraph (m);

(iv) a partnership that falls within the description in paragraph (m).

For the purposes of paragraphs (k) to (n) above:

  • “relevant date” means the date on which the advertisement, invitation or document (made in respect of securities or structured products or interests in any collective investment scheme, which is intended to be disposed of only to professional investors), is issued, or possessed for the purposes of issue;
  • “custodian” means (i) a corporation whose principal business is to act as a securities custodian, or (ii) an authorised financial institution under the Banking Ordinance (Cap. 155 of the Laws of Hong Kong); an overseas bank; a corporation licensed under the SFO; or an overseas financial intermediary, whose business includes acting as a custodian; and
  • “portfolio” means a portfolio comprising any of the following (i) securities; (ii) certificates of deposit issued by an authorised financial institution under the Banking Ordinance (Cap, 155 of the Laws of Hong Kong) or an overseas bank; and (iii) except for trust corporations, cash held by a custodian.

Institutional Investor / Accredited Investor Definition

An institutional investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(a) the Singapore Government;

(b) a statutory board as may be prescribed by regulations made under section 341 of the SFA, as prescribed in the Second Schedule of the Securities and Futures (Classes of Investors) Regulations 2018;

(c) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is —

(i) to manage its own funds;

(ii) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or

(iii) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country;

(d) any entity —

(i) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and

(ii) whose funds are managed by an entity mentioned in sub‑paragraph (c);

(e) a bank that is licensed under the Banking Act 1970;

(f) a merchant bank that is licensed under the Banking Act 1970;

(g) a finance company that is licensed under the Finance Companies Act 1967;

(h) a company or co‑operative society that is licensed under the Insurance Act 1966 to carry on insurance business in Singapore;

(i) a company licensed under the Trust Companies Act 2005;

(j) a holder of a capital markets services licence;

(k) an approved exchange;

(l) a recognised market operator;

(m) an approved clearing house;

(n) a recognised clearing house;

(o) a licensed trade repository;

(p) a licensed foreign trade repository;

(q) an approved holding company;

(r) a Depository as defined in section 81SF of the SFA;

(s) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere;

(t) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;

(u) a designated market‑maker as defined in paragraph 1 of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations;

(v) a headquarters company or Finance and Treasury Centre which carries on a class of business involving fund management, where such business has been approved as a qualifying service in relation to that headquarters company or Finance and Treasury Centre under section 43D(2)(a) or 43E(2)(a) of the Income Tax Act 1947;

(w) a person who undertakes fund management activity (whether in Singapore or elsewhere) on behalf of not more than 30 qualified investors;

(x) a Service Company (as defined in regulation 2 of the Insurance (Lloyd’s Asia Scheme) Regulations) which carries on business as an agent of a member of Lloyd’s;

(y) a corporation the entire share capital of which is owned by an institutional investor or by persons all of whom are institutional investors;

(z) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005) in which each partner is an institutional investor.

An accredited investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(i)  an individual —

(A) whose net personal assets exceed in value $2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(B) whose financial assets (net of any related liabilities) exceed in value $1 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount, where “financial asset” means —

(BA) a deposit as defined in section 4B of the Banking Act 1970;

(BB) an investment product as defined in section 2(1) of the Financial Advisers Act 2001; or

(BC) any other asset as may be prescribed by regulations made under section 341; or

(C) whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(ii)  a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —

(A) the most recent audited balance sheet of the corporation; or

(B) where the corporation is not required to prepare audited accounts regularly, a balance sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance sheet, which date must be within the preceding 12 months;

(iii) A trustee of a trust which all the beneficiaries are accredited investors; or

(iv) A trustee of a trust which the subject matter exceeds S$10 million; or

(v) An entity (other than a corporation) with net assets exceeding S$10 million (or its equivalent in a foreign currency) in value. “Entity” includes an unincorporated association, a partnership and the government of any state, but does not include a trust; or

(vi) A partnership (other than a limited liability partnership) in which every partner is an accredited investor; or

(vii) A corporation which the entire share capital is owned by one or more persons, all of whom are accredited investors.

Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).