Preqin data indicates potential market size could increase from $26.7bn to $158.0bn by 2028
The infrastructure secondaries market is primed for explosive growth over the next few years, with the potential for assets under management (AUM) in the strategy to increase nearly sixfold in the next five years.
‘We’re excited – really excited – about the potential of the infrastructure secondaries market,’ Wandy Hoh, Head of Infrastructure Secondaries at Macquarie Asset Management in New York, told Preqin News. ‘Secondaries are nearly 8% of AUM in private equity and just 2% in infrastructure, so any bridging of that gap means huge growth. Additionally, secondaries are a derivative of their primary market, and primary infrastructure is one of the fastest growing alternative products, with AUM having doubled twice in the past decade.’
In the Preqin 2024 Global Report: Infrastructure, AUM within the asset class is forecast to grow from around $1.1tn at the end of 2022 to $1.7tn at the end of 2028. While it is unlikely that infrastructure secondaries will completely close the gap with private equity secondaries in four years, the data points to a potential market size of $158.0bn in 2028, nearly six times higher than the current AUM of $26.7bn.
Infrastructure secondaries: room to grow
Source: Preqin Pro. Data as of May 2024
Hoh joined Macquarie in 2020 to build an infrastructure secondaries business, having previously worked at Glenfarne Group, Pomona Capital, and DLJ & Credit Suisse. The firm has completed several secondaries deals off its balance sheet and is now in the market with a $1bn target secondaries infrastructure fund, according to Preqin data. Macquarie declined to comment on the fundraise.
‘Our investors tell us they are increasing their infrastructure allocations, and we’re in constant contact with investors looking to make allocations for the first time,’ said Hoh. ‘Is there a need for all these infrastructure dollars? Yes. I don’t think anyone disagrees with that. There’s energy transition, technology, AI, and the desperate need to improve infrastructure in most of the developed world. That’ll drive growth in primary infrastructure, and secondaries will grow as a derivative.’
Hoh says the asset class has become more interesting for investors – both institutional and individual – because of higher inflation and interest rates: ‘The yield component has become an important factor in the whole return set. It’s not just simply what return can you make, it’s about what you can make in combination with the yield so you can derisk while you own the asset. Infrastructure checks those boxes and has all of a sudden become a lot more appealing.’
The attractions of infrastructure secondaries are much the same as for private equity secondaries: LPs can mitigate the J-curve and access positive returns sooner; build a portfolio that is diversified across managers and vintage years quicker; have greater visibility on the assets rather than commit to a blind pool; and can, in some instances, get shorter duration exposure than is typical in primary infrastructure.
William Barrett, Managing Partner at Paris-based advisory firm Reach Capital, told Preqin News that infrastructure secondaries are well suited to a wide range of institutional and private wealth clients, particularly those looking to enter the asset class for the first time: ‘It makes sense to gain exposure to infrastructure through secondaries, as it does in private equity. You get to learn how the market works, diversification, and visibility on risk-reward and duration. It makes total sense to put a private bank client in an infrastructure secondaries fund.’
A lack of suitable capital has slowed transactions growth in infrastructure secondaries. ‘The big problem for infrastructure secondaries is that a secondary fund transaction and infrastructure couldn't match, given the cost of capital of a private equity secondary fund. The performance was simply not going to match what GPs had promised their investors,’ said Barrett. ‘So, it’s great that we’re seeing new entrants coming to the market with dedicated funds.’
France-based AXA IM Prime is currently in the market raising a €1bn ($1.1bn) fund, which will invest primarily in energy and digital assets in North America and Western Europe. According to Preqin data, StepStone ($750.0mn target) and Partners Group ($1.0bn) are among established secondaries investors raising their first dedicated infrastructure fund, though they have a decades-long track record in infrastructure secondaries acquired through other funds and segregated accounts. HarbourVest Partners, Ares Management, and Stafford Capital Partners are all in the market raising successor funds.
The particular risk-return and duration characteristics mean that maturing infrastructure assets in unlisted funds could be attractive to different types of buyers.
When Ely Place Partners, a placement agent and secondaries advisor, was appointed to advise an LP on the sale of its position in BlackRock Renewable Income UK Fund, traditional buyers did not fit the mold. After a competitive process, the position was sold for £107.0mn ($136.0mn) to London LGPS CIV (London CIV), a UK public sector pension fund. London CIV manages £11.2bn ($14.2bn) of assets and bought the position through LCIV Renewable Infrastructure Fund, which has an open-ended structure.
‘BlackRock’s Renewable Income UK fund is a 25-year fund, and when our clients sold their position, it still had almost 19 years left with a very stable, inflation-linked return,' Daniel Roddick, Founder of Ely Place, told Preqin News. But that sort of profile doesn’t work for most traditional infra-secondary buyers, who have limited terms, and whose cost of capital requires a significant discount to match their return targets and generate sufficient management fees and carry. So, you need to go outside of the traditional secondary buyers to find liquidity.’
The range of potential buyers of secondary assets creates a particular and unique situation for GPs, with pension funds, insurance companies, and sovereigns all having the potential to be both LPs and end buyers of assets: ‘I think the biggest long-term risk for infrastructure secondaries is that your LPs become sophisticated enough that they become the buyers of your assets and don’t need you anymore,’ said Barrett.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.