Speaker 1Hi, I'm Bruno Alves, Editor-in-Chief of Infrastructure Investor. In today's episode, I sit down with Madeline Farman, Editor of affiliate title Secondaries Investor and host of the Second Thoughts podcast, as well as America's editor, Zach Bentley, to talk about the infrastructure secondaries market. In our discussion, we track the evolution of the burgeoning infrastructure secondaries market, the asset classes best-in-class pricing compared to other private markets, how LP-led deals rule by volume, but GP-led transactions end up being the most sizable, the outsized role of continuation funds in infrastructure, and much more. Hi Maddy, Zach, welcome to the podcast. Hi Bruno. Thank you for having me, Bruno. No, I'm very excited actually, Maddy, because we are talking about secondaries today and infrastructure secondaries in particular, which feels like one of the hot topics of the day across private markets, and we get to have you, who's an actual expert, as opposed to Zach and I, so we can now put you on the spot and gently grill you as much as we can. So thanks very much for agreeing to this.
Speaker 2No, thank you for having me. And the secondaries market is certainly keeping. us very busy. I often joke, I wish I had five sets of hands, but it's all go, it's all go.
Speaker 1So, I mean, I think, you know, that's, that's really where we start, isn't it? It feels, especially for those of us of a certain age, and we've been watching secondaries take off year by year, but it really seems we're at this moment of, you know, this incredibly high popularity in, in the wider secondaries market. So maybe we can start there, Maddy, you can frame it a bit, what you're seeing and just in general in secondaries.
Speaker 2Yeah. So if we. Just take a massive step back, sort of 2017, 18, we really saw the emergence of a rebranded technology, continuation funds become the front and center for many managers as a way to elongate their hold of assets. And it was a question that has been asked for a long time. We saw long hold funds and areas like private equity, we saw fund to fund transfers of assets in order. And so, you know, one of the things that we've been looking at is, you know, how to, you know, continue to keep hold of them for a longer period. And this technology has just continued to snowball from the sort of larger blue chip managers using them at that time and normalizing this technology to mid-market managers, lower mid-market managers, all having done their first single asset continuation fund in recent years. What's also interesting is that since COVID, really, we've seen the denominator effect become a pressing issue for many LPs out in the world. So, you know, I think that's, you know, we've seen the denominator effect become a pressing issue for many LPs out in the world. What do they want? They want liquidity from their private assets holdings. And so many of them have been coming to market and this continues. I mean, the tariff scenario in the US and elsewhere has only exacerbated this. LPs coming to market to search for liquidity, offload some of their holdings and reinvest back into private markets should they wish to. So it's a really interesting time. There's a lot of activity and as I sort of say, keeping us on Secondary's Investor very busy at the moment.
Speaker 1And so you're seeing essentially two sets of, you know, broadly speaking of demand levers, right? So there's the LP liquidity angle, very much of its time now and then there's a continuation fund angle, which I guess is a bit of a GP led play, isn't it? So you're just seeing these levers getting pulled across the LPGP nexus.
Speaker 2Absolutely. And given that LPs are looking for liquidity, managers are looking for ways to exit their assets, so a normalised continuation fund technology, whether it be a single asset fund or a multi asset fund, seems pretty attractive to a lot of people right now.
Speaker 1Yeah. And actually, I want to deep dive a little bit on continuation funds in just a second, but just wanted to put something in front of you. So at our global summit, which we held in Berlin in March, we had several panels on infrastructure secondaries and one of them, we heard that about 14 to 15 billion US dollars of infrastructure secondaries deal volume closed last year. Yeah. And that is a potential 40 to 45 billion dollars. So that's about a third of deals or something like that. So I'm curious, how does that supply demand mismatch compare with the other asset classes that you see?
Speaker 2So I don't know if I can go into specifics necessarily of how much volume is completed versus how much potential activity there was across asset classes in a granular way. But what I can say is that the supply demand mismatch. The supply demand mismatch across the secondaries market is quite stark. So one of the common pieces of commentary that we hear on secondaries investor is there's just not enough capital in the secondaries market to meet the demand to sell into the secondaries market. And why is that? This is all of a sudden to the points that we were just making earlier, a market where there's a huge amount of demand from both LPs and GPs. However. If we take continuation funds, for example, there hasn't been a huge number of exits from these transactions. And so LPs are, you know, considering whether or not they want to back a GP led vehicle. Obviously, some LPs out there definitely do because we've seen some large fundraisers, but it's not a broad swathe of investors that definitely want to invest. So what does that mean? It means that ultimately managers and LPs. Can come to market wanting to do a deal, and they might come out with a deal that is particularly sizable or on the LP side, a portfolio that is particularly sizable, but they might not necessarily be able to get all of that done in the secondaries market just because of that supply demand mismatch that we see across the market, not infrastructure specific.
Speaker 3Just to add to that, I was speaking to a large secondaries player recently that's an LP in a lot of GP led cars. GP led continuation funds and they were just saying that in some of the more major transactions we'd see in the infrastructure space, you'd find them and a lot of call it the other blue chip names we'd all know in this market. They'd all be in those continuation funds because they can only each invest a certain amount in these funds and you find a kind of who's who in all of them. And still sometimes the GP is struggling to garner all the capital up just because of the supply demand imbalance and usually the size of the single asset continuation funds.
Speaker 1So just to jump to pricing again, in Berlin, we heard that discounts of around eight to 10% were kind of emerging as the price for liquidity and infrastructure secondaries. There's this report from Greenhill saying infrastructure secondaries scored the strongest pricing I believe among strategies in 2024 and that was averaging around 94% of net asset value. Again, Maddy, if you're in a position to do a bit of a look across asset classes, how does that discount to NAV compare? How does the pricing look like compared to other asset classes?
Speaker 2So yes, I've got the same report sitting in front of me. Greenhill obviously putting infrastructure secondaries pricing at 94% of net asset value for funds out in the market last year. It is by far and away the best priced secondary strategy over last year in the course of the last five years or so. It's interesting, I think we look at the next asset class sitting there. Private credit is sitting at 89% of NAV and buyouts, the most popular asset class traded in the secondaries market sitting at 87% of NAV. So if we take a look at the Greenhill report and why they say infrastructure funds are pricing so well, they say infrastructure funds continue to be appealing to secondaries buyers due to their combination of stable cash flows, inflation protection and valuation upside potential. So particularly in the market that we see. Now, obviously, those things are going to be incredibly interesting to a secondaries buyer. I think what's interesting is when we look at pricing in the secondaries market, it creates a little bit of a strange dynamic. So if pricing is so good, is that the most interesting strategy where you could be as a secondaries buyer, the most competitive compared with your peers? Can you offer the strongest pricing here or is there an interesting area? Where you could find a discount in the infrastructure secondaries market. So I think there's all sorts of dynamics at play here and I'm sure the secondaries market is trying to filter through where it can be competitive and where it might find sort of off diary, off market interesting transactions where it can really showcase to its investors that it's found a good investment at a discount and their peers will not get a look in whatsoever. I'm sure that's happening.
Speaker 3Yeah. I mean. I think everybody will be quite used to the secondaries industry and the wealth of data that comes out. But just to maybe even slightly more optimism from the recent Campbell-Lutchins report, infrastructure trading last year at 96%, buyouts at 94, and then you had sort of venture at 75 and real estate at 73. And I think not only that sort of Hamiltonian put it into a very nice digestible graph where infrastructure's discount has never slipped below 95% according to this report. Whereas the other asset classes have sort of much more up and down. So it is. This. Stable. Portfolio protection. Role. are looking for their infrastructure portfolios, it's sort of coming to bear when you look at the 7G market. Yeah.
Speaker 1Of course, this is not this simple, but I do wonder if from an LP point of view, Maddy, and you can jump in, if I can get this full price and I need some liquidity, then maybe I go here first to sell some of this stuff because I get my 95%. Of course, the flip side to that is I may not be over allocated or even close to that, in which case I don't want to sell it. But do you think it creates a little bit that temptation because you do seem to get very close to 100% there?
Speaker 2We've certainly seen portfolios come to market where people are looking to sell a wide range of different asset classes. Obviously, as you say, Bruno, if you're able to get very compelling pricing on an infrastructure portfolio, that is certainly an area where you might look to divest some of your holdings right now. I think the other interesting dynamic that we're seeing is selling some infrastructure stakes as part. An overall private markets portfolio could offset some of those discounts that you might see in venture capital, for example. Secondaries buyers are often thinking, right, I'll mix and match with some harder to price, slightly less compelling fund stakes if you can offer something that's going to be very compelling at the upper end of the market. And we can find a sweet spot whereby maybe we can offer an effective price that you're happy to take as the seller. Obviously, that's a very simplified knockdown of how these secondaries buyers look at these transactions, but you'll get the gist from that explanation, I'm sure. I think definitely LPs will be looking at their infrastructure portfolios as part of that overall, what does our portfolio composition look like and how do we reach an attractive price in order for us to green light a sale? But I'd be curious to know what you both are seeing in terms of how infrastructure compares to other asset classes and what LP appetite is for infrastructure right now.
Speaker 3Well, not to give too much of a spoiler for our July/August cover, but this is what we're looking at. And I think one of the prevailing themes coming out, it is this sort of protection status that I was talking about before, that sort of the other asset classes, you might get much higher returns, but have seen a lot more volatility in the past three, four, five years, whereas infrastructure broadly has remained the same. And I think that bears through to what you're talking about here.
Speaker 1And just in terms of, you know, we started the podcast by talking about, again, how we're seeing secondaries coming at it from the LP side, from the GP side. And I think I'm right in saying that some asset classes, LP leads maybe tend to dominate, some others, it may be slightly different. Maybe, Zach, I remember you did a roundtable on this last year on secondaries, that is infrastructure secondaries. Do we have a sense here of where we fit infrastructures and asset classes? Is it mostly GP leads that dominate? Is it nicely split? Is it LP leads? What have you heard?
Speaker 3The understanding that I have from the data that's provided and from speaking to people is that the bulk of the activity is LP lead, but sort of where you see the big ticket items is in the GP leads in those continuation funds. You're interested to hear what goes on in these continuation funds outside of infrastructure. But we're usually looking to see where they're going to be in the future. So we're looking to see where they're going to be in the future, but we're also looking to see where they're going to be in the future. So we're looking at really high ticket items, some of those large scale data center platforms, or in GIP's case, a couple of times, airports, which go for very high transaction costs.
Speaker 1And Maddy, out of curiosity, what do you hear about infrastructure in terms of this GP LP lead balance? But also, how does it, again, if possible, compare with other asset classes? Is it more or less all the same in terms of dynamics? Or are you seeing different things at play here?
Speaker 2It's really interesting on the GP lead side of the infrastructure secondaries market. I have heard the same things as Zach. Obviously, the LP lead market in terms of the amount of deal flow that we see, and the numbers of deals getting done is sort of surpassing the GP lead side of the market. However, the GP lead side of the market, while the number of deals is fewer, these transactions are very sizable. And I think ultimately it comes down to the fact that obviously, as you both will know very, very well, the underlying assets that are part of these GP lead transactions are sizable in and of themselves. To the point that I made earlier, there is a supply demand imbalance problem. There's only so much capital available to invest in infrastructure secondaries. But in terms of the art of the possible as to how large these get, this infrastructure secondaries market is an area that we look at intensely to see how large are these deals. What types of structures they're using, and what demand is like, both from the secondary side as well as investors into, and the GPs themselves in the infrastructure secondaries
Speaker 1market. Yeah. I definitely think continuation funds are one of the more interesting technologies to have emerged, and I think they will play an outsized role in infrastructure when it comes to GP leads, if only on size alone. Okay, I need to get one thing out of the way. This is maybe an old perspective. Perception. Let's put it that way. But if you, I'm sure you both will remember that when these first vehicles emerged, the perception was that they served as a bit of a dumping ground for poorly performing assets. I'm guessing that perception has left the building or not quite, or is there still a little bit of a cloud hanging on continuation vehicles?
Speaker 2Yeah, no, absolutely, Bruno. So I think obviously the genesis of continuation funds was, they were used as, the technology was used to restructure zombie funds, essentially. So funds that were hobbling along in their life, LPs wanted their money out, the manager wasn't able to raise a new fund, and there was essentially stranded assets. The continuation fund technology was essentially a rebrand of that. So a number of high quality blue chip managers raising continuation funds for their star-performing jewel-in-the-crown assets. And so I think it's understandable that people still perceive that this technology is or was used as a dumping ground for assets. But ultimately, what's the check on this? The check is the secondaries market itself. So again, I feel a bit like a broken record, but there is a supply-demand imbalance. There's only so much capital that secondaries buyers can invest into. deals that come across their desk and they are going to be looking for the best performing assets the best deals that they can get done at pricing that is attractive for their funds and ultimately that means that these need to be good assets with a good trajectory these secondaries buyers have their own limited partners and they're not being mandated to go out and essentially buy rubbish that won't perform well so the secondaries market acts as as the check on whether or not a good performing asset will go into it and they have their own check there the limited partners who want to see returns on their investments when they hand over checks to these these buyers so are there will there be some continuation funds that don't perform well absolutely but they have been underwritten to a high standard and those secondaries buyers will be expecting good returns yeah and
Speaker 1hopefully that really functions as a check i would say
Speaker 3anecdotally i think just lps are much more aware of this now um than maybe they they weren't in the past and so they're a bit more suspicious when a continuation fund comes to be presented to them but i think that also the gps know that this is this is not something that uh you can just dump anymore that what we see going into infrastructure continuation funds these days are usually either data center platforms or renewables platforms where the work is not done there's so much more development capital needed that they need to put this elsewhere and get new capital for
Speaker 1it so at our infrastructure secondaries roundtable last year and you you you were on it zach so you may recall this but participants argue that while the role the continuation vehicles can present for growth assets is now well understood there's a less clearly defined opportunity for stabilized assets and i wonder if you maybe we'll start with you zach if you can give a sense of why why people are why are they thinking that way what's what's the bottleneck when it comes to
Speaker 3stabilized assets stabilized assets as they imply are more of a sort of core infrastructure play you're not going to be generating the the high returns out of that so just as we see on the primary side where core infrastructure has ebbed and flowed over the last few years we're also not going to see a wild line of willing buyers stepping forward for something that looks a bit more cool i did want
Speaker 1to touch on something i think you you said it at the beginning of the podcast maddie was um about actually exit activity from continuation funds themselves and that there isn't a whole lot of that zach you did an interview recently with a an infrastructure outfit called uh energy capital partners um owned by bridgepoint also the full disclosure owner of pi group and ecp has done well actually exiting from continuation funds haven't them uh they are
Speaker 3as uh their founder doug kerwin said to us two for two uh in the last couple years so they first raised for terragen which uh was one of the largest u.s renewables platforms They raised 1.2 billion for that, I believe, and exited last year to Mazda, the UAE outfit. And then quite significantly, they also raised 1.6, I think, for Calpine, the largest portfolio of gas generation assets in the US, and recently sold that to Constellation Energy in a huge deal. I think it was equity value of about 20 billion. And so they were very clear that these were deals where they wanted to continue to see the returns of these portfolios. They were massive. They were performing really well. They didn't want to see the end, but they had to get liquidity on the funds that were involved. And I think on Calpine, some of the continuation fund money was also alongside fund money, but they ended up making a 5.1x gross multiple on that deal, which is pretty sizable.
Speaker 1Yeah, I would think this is not perhaps your typical return for what goes into a continuation fund. Let's just put it that way. The hold periods were also relatively short. Maddy, is it the case in most continuation funds, it's just the hold period is still ongoing, right? As we speak, I would wager.
Speaker 2Yeah, so there hasn't been a lot of exits. And it's understandable at a certain point, right? Because the whole of the private markets, asset classes are facing a exit crunch. So funnily enough, many of these continuation funds, the sort of newer, form for crown jewel assets, they were moved into continuation funds between 2018 and 2021. And then they face a sort of liquidity crunch across private markets and have the same headwinds that other managers will have with their underlying portfolio companies and closed-end normal life funds. So it's interesting the way that the secondaries market has kind of started to react to this. There are a number of advantages. There are advisors who are actively tracking this, Evercore alongside with HEC Paris, the business school there. Morgan Stanley does a sort of continuation fund performance report. And essentially, it is trying to track the early returns of some of these continuation fund vehicles. But still early days. Let's see how continuation funds perform when they do start realizing these assets once markets start to unwind a little bit and we see a lot more. And then there's M&A and IPO activity in the future.
Speaker 1Yeah, you certainly, I think, in infrastructure see, and of course, there's an element of serendipity and just good fortune really to all of this, but you can see, you know, some of the good that can happen if you put this technology in place and just hold on to the asset for longer. And it's a good asset. And I'm thinking here of Gatwick Airport, which is in a continuation fund. Gatwick has now gotten UK government backing to do another one way. Gatwick has done extremely well, even before, you know, getting rolled into a continuation fund. It is likely if it gets sold with a second runway in place to do, you know, extremely well again. And so you can see how the technology in this context can really be put to work if you have really good assets and you can just keep getting the good stuff out of them, so to speak.
Speaker 2And ultimately, this continuation fund technology is being used in scenarios where the argument has been made many, many years ago now. That ultimately, PE firms were selling their assets to their competitors to make the next set of returns. They felt half done by. They knew that they could have taken it to the next level. So ultimately, they're backing themselves with these new continuation vehicles to just hold on to those assets a little while longer so that they can reap the rewards rather than one of their competitors swooping in and doing it for them.
Speaker 1Well, that's actually kind of the perfect segue for the last thing I want us to do. We're going to talk a little bit about what we're going to discuss and this is something that your fellow secondaries guru Adam Lay wrote about recently and I found this super interesting. So I'm going to let you actually explain it to the audience, but you guys recently wrote about this most interesting development in the secondaries market, which you called the buyer led secondaries deal. So most of our audience will probably not be familiar. So maybe Maddie, you can give a quick summary. What's the buyer led secondaries deal?
Speaker 2Yeah, so it's a fascinating topic. My colleague, Adam, obviously has been. Out speaking with lawyers and market participants and stumbled across an interesting dynamic. So if we take a step back and I talked about this at the top of the podcast, you have secondaries transactions that are either initiated by the LP, so they're seeking liquidity. They're looking to offload portfolios on the secondaries market. And then you have those transactions that are initiated by the GP or the manager, and they are looking to provide liquidity to their underlying investors. This is where single asset and multi-asset continuation funds fall in, as well as some other liquidity solutions that GPs can utilize in order to get liquidity to their investors or use it to support their hold for an asset. What Adam's labeled here is the buyer led deal. So in such processes, the transaction is initiated. It's either by the LP or GP, but they're initiated by the secondaries investor themselves. So ultimately, as we've sort of talked about, secondaries investors are looking for compelling opportunities. They want to be competitive. They want to get the best returns for their underlying investors. A number of secondaries buyers are out raising new record funds for their shops. And ultimately what this creates is a dynamic where, you know, the buyers are looking for something that's incredibly compelling. In these scenarios, these buyer led deals, buyers are searching for assets from nonconventional sellers such as asset managers or strategics. The buyers are then proposing deploying GP led secondaries technologies such as a sort of special purpose vehicle as the buying entity for these assets. To the buyer, such a structure differs a little from the bog standard GP leds that they may back with a traditional fund sponsor. To the asset owners, such a structure provides additional capital in a situation where they may want to invest more capital in a portfolio. So there appears to be several important drivers behind where and why such deals are happening as my colleague Adam has chronicled. So for starters, they're more likely to occur in the real asset space. So really interesting for your listeners. Sources told Adam this is likely because unlike PE, real asset managers have closer relationships to the underlying assets compared with their corporate brethren. So Adam's used the example of a real estate investment professional, for example, who is more likely to have a background in direct property management than in corporate finance. As such, their peer networks and sourcing channels are more likely to be directly linked to underlying property assets, meaning there is a higher chance for that asset that they become aware of to sit outside of traditional fund structures. Another factor is that secondaries capital is inherently passive and secondaries funds don't have carte blanche to invest in any type of deal that they see fit. So that means buyers need to create a fund structure to house those assets so they can sit underneath it as a limited partner. So it's a really interesting dynamic. It's just another sort of source, another funnel of opportunity for these secondaries buyers. They're very, very clever people and are always on the hunt for new ways that they can deploy capital and be competitive. Yeah. It's a really interesting time, but I'd be curious to know if you've had any chats, Bruno, with any of your sources who seem interested in these types of transactions or understand what is going on here and whether they'd be curious to do it for themselves.
Speaker 1Yeah, I think understand would be the key here. I mean, I haven't is the short answer there, but what I'm really, really interested about in this potential new technology is the non-traditional player bit. The fact that you could, in theory at least, get corporates involved, right? If I read Adam's piece correctly, a secondaries buyer could go, in theory, directly to a corporate, offer up some of these secondaries technologies, and the corporate wouldn't have to sell the asset potentially in a traditional matter. It would house them in some of this technology, potentially, if it was legally able to do so, even reap some fees. But even if not, at least maintain, you know, that ownership of the asset while getting a bit of liquidity injection. That is very interesting if you think that we have spent a lot of time as an industry talking about carve-outs, and this is almost like a carve-in in a way. If you could use technology to do that, you could see that being popular, right? You can see somebody say, "Oh, actually, I don't have to sell, you know, my cost center. I can just make it less of a cost center now." So I'm looking forward to it, to seeing people getting creative with this. And it strikes me if that does happen, we have secondaries capital actually competing a bit. We have primary capital. And that's going to be interesting in and of itself. I guess one thing, maybe it's a nice note to end on if I think about this technology, is the discount to NAV that is so central to secondaries. If you do something like this, I suppose you could have a discount as the price of liquidity and the same thinking could apply. But maybe not, right? Because if you're not a forced seller, you may actually want, you know, a profit from your asset, actually. So this is something I'd be very interested in. be very interested when these transactions come to market. Is there going to be a discount? discount to NAV? I don't know. I guess it's too early unless you have any insight, Maddy, already, but I'm going to be looking out for that.
Speaker 2Yeah, well, certainly I think not every asset comes at a discount to NAV. Certainly deals that have been done that have been priced at par or premium. So all options are on the table. If it's a compelling asset that the manager believes has great runway, secondaries buyers agree, let's see what happens. But the other maybe one interesting point to mention as well is the secondaries buyer universe is growing. It's not a sort of list of 10 secondaries buyers that everyone knows going into either GP-led or LP-led deals. Limited partners can be secondaries buyers. Even corporates could be secondaries buyers in the future. Traditional infrastructure managers, could be secondaries buyers. So the universe is also enlarging. It'll be interesting to see how the space develops.
Speaker 1Yeah, most definitely. I think that's a great note to end on. So Maddy and Zach, thanks very much for joining the podcast and I will see you soon. That, again, was Madeline Farman, editor of affiliate title Secondaries Investor and host of the Second Thoughts podcast, and America's editor, Zach Bentley. To hear more of our episodes, head to InfrastructureInvestor.com/podcast or you can search and subscribe to the Infrastructure Investor podcast wherever you like to listen.
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