← The Infrastructure Investor Podcast
The Infrastructure Investor Podcast
Pantheon: ‘Infra secondaries is becoming a core allocation for investors’
00:24:58
Loading summary
Transcript32 lines
- [00:03]
A
Hi, I'm BrunoAlvis, Editor in Chief of Infrastructure Investor and welcome to the Infrastructure Investor podcast. In today's episode, I sit down with Andrea Ekberg, Global head of Pantheon's infrastructure team. Andrea is a veteran of the infrastructure secondaries market and we talk about its evolution from a niche strategy into a core part of institutional portfolios. The discussion explores the impact of higher interest rates and liquidity constraints on deal activity, why investor appetite for infrastructure secondaries continues to grow, and how pricing, fundraising and competition are shaping the market. We also touch on what Andrea called the good, the bad and the ugly of continuation vehicles, the opportunities created by long term themes such as digital infrastructure and the energy transition, non GP sources of assets and what the next phase of growth could look like as the market becomes increasingly institutionalized.
- [01:06]
B
Hi Andrea, welcome to the podcast.
- [01:08]
C
Hi Bruno, great to be here. How are you?
- [01:11]
B
I'm good. So I feel that secondaries have gone through a bit of a step change over the past few years, going maybe from being somewhat esoteric corner of private markets to an ever more mainstream popular liquidity management tool. And some of this feels like it's been, you know, the consequence of some of the macro changes and liquidity challenges that we've had. But you've been in this space for many, many years. So my first question to you is, is there been a tipping point? Was this always going to happen? How do you see it?
- [01:44]
C
Yes, yes, Bruno, we've been in this market since 2010. The initial market was very much buoyed by the post GFC problems that we saw within some of the infrastructure funds. Following that, the market has been quite slow. We've been able to find interesting deal flow, but there was a long decade in the 2010s that was quite slow. We were always confident that this market was going to come. The secondary market is a derivative of the primary fundraising market. Infrastructure is a more nascent asset class. But it's had very, very strong year on year growth, 10% CAGR over the last 10 years. So it's inevitable that a functioning secondary market is going to be needed. And you know, we look at what's happened in PE and we were confident it was going to come. Was there a tipping point? Absolutely there was. So the fundamentals were there. The market had got to a size of kind of 1.3 trillion of unrealized value. But the tipping point was absolutely coming from the change of rate environment that followed the OECD inflation and obviously the actions of the central banks. The initial reaction to that was obviously public Market declines, denominator effect that pushed forward a lot of very motivated and then we've seen an ongoing period of tight liquidity. M and A markets exit markets have been very slow across private markets and infrastructure being no exception. And that's really precipitated a very significant increase in LP stake deal flow. And I think to kind of put this in context, obviously the rate change happened in 2021. The deal flow that we logged in 2020, which was a low point, was really 14 billion of deal flow we logged. The last couple of years it's been in excess of 50 billion. So a huge hockey stick of opportunity and really what's just been a very, very attractive market to invest into.
- [03:41]
B
If we zoom out then a bit across asset classes, where does infrastructure rank in terms of popularity in the secondaries world nowadays?
- [03:52]
C
Yeah, I mean look, as I said, infrastructure is, you know, a more nascent asset class. It's rapidly growing. It's a very popular asset class for investors who are really looking particularly in the volatile geopolitical macro environment we're in today, looking at the defensive characteristics, the inflation protection, the downside protection. So infrastructure is very, very popular, but it is a smaller part of private markets. And so I think to put the context around secondaries, the broader secondary market is around, call it 230 billion per annum of deal flow. Infrastructure last year according to the intermediaries was somewhere in the 25 to 30 billion. So a little bit more than 10, a little bit less than 15% of the overall secondary market, but definitely a growing part of that market.
- [04:44]
B
Yeah, and also one of the things that seems to be jumping out at us in terms of infrastructure secondaries is that they tend to command high average pricing or that is what we hear. But I wanted to ask you, what does that look like on the ground in reality? Is that still holding up?
- [05:03]
C
Yeah, and again I think this comes from the characteristics of infrastructure. Much less cyclical, very, very defensive. We've seen little pockets of distress, we've seen a little bit of dispersion of returns. But I think that stability means that infrast portfolios have generally been trading at lower discounts than you might see in private equity, for example. So investors who may be struggling in terms of the liquidity that hasn't been coming back in their private equity may actually look to sell some of their infrastructure portfolio because they can achieve better pricing. It has been a buyer's market. I mean we've been achieving pricing over the last five years, more in the mid teens. But I do think Market pricing for very high quality portfolios today is much more in the single digits.
- [05:53]
B
Right, right, right. And of course you're touching on it. But again another thing that feels from the outside is that we records are continuing to be broken in the infrasecondaries market and I'm thinking particularly in fundraising. So you're touching on some of the drivers. But I just wanted to expand on, you know, what else you see driving LP interest in fundraising for these large incumbent managers.
- [06:17]
C
Yeah, I mean records have been broken everywhere, including in the underlying infrastructure fund market which just had another record year. So clearly the recovery is there, fundamentals are there. But for infrastructure secondaries we've just seen a huge increase in investor appetite. It's becoming a core allocation for investors. It's also then being backed by record deal flow. So I've talked about the kind of 50 plus billion we've seen over the last few years, record deal volumes getting transacted, the 25 to 30 billion. So the market as a whole is really maturing and institutionalizing from what was a very niche market to a much more institutionalized and effective market for investors to sell in. I think. Why do LPs want to have an infrastructure secondaries allocation today? I mean firstly, I think it's part of an infrastructure allocation which is increasingly important when we've got all the volatility we've seen in the 2020s to have an asset class that is so defensive. We've looked across our entire company data portfolio for the 2020s and in real sharp contrast to the 2010s which were so very, very benign and low interest rates, the 2020have been characterized by huge amounts of on again off again volatility. We had Covid and actually Q1 of 2020 was the only period in the 2000 and 20s where we saw negative returns just in that quarter across our entire 1500 assets in our portfolio that was very much driven by the shock of volume driven assets of COVID quickly recovered over the next two quarters. And throughout this period, where we've had Russia, Ukraine, interest rate rises, tariffs, the tensions in the Middle east, every quarter has had a positive return within the overall portfolio. So infrastructure itself is very much an important part of investors playbooks today. What makes secondaries even more compelling is not only do you get access to those infrastructure characteristics and all that positive correlation to inflation, you're getting early dpi, you're getting significant DPI even in the investment period of the fundamental faster deployment, shorter duration, shorter hold periods and a lot More diversification across vintage, across manager and across assets. You know, 600 plus assets in a fund gives you a lot better risk adjusted returns than you might have having 10 assets in a fund.
- [08:50]
B
Yeah, but I mean you're well established, pantheon is you've been in the market for ages. Many of the incumbents we were just alluding to same, but maybe if I'm hearing all this and thinking, great, I want to try and get into this market, but I'm actually a smaller or newer entrant, how do you assess the probability of that happening? Are new entrants able to penetrate or not so much?
- [09:15]
C
So look, when you see a growth in market opportunity that we've just talked about, it's absolutely inevitable that you're going to see new entrants coming into that market. And although it begrudges me to say this, it's actually necessary for an effective market and that does benefit all of us. Having an efficient market ultimately drives deal flow and that's good for everybody in the market. But I think we've definitely got a kind of two tier market where you've got kind of two, three very large scale players and we sit amongst those having been one of the early movers in the asset class who are able to underwrite and compete for some of the larger portfolios, the 400 $601 billion plus portfolios and then new entrants coming in, a lot of them backed by very well known asset management groups are able to corral some capital. But still sitting at a smaller edge of the market. There's certainly some barriers to entry around information, data relationships with gps that, you know, make it easier if you've, you've had a long term business and you have a very long term primary business that we have also in our fund of funds business to you know, build those relationships with gps. But those new entrants are getting in. Obviously lack of track record is something which any new entrant will struggle with. But you know, I think there's space. The asset class continues to grow, secondary deal flow continues to grow. There are space for some new entrants
- [10:49]
B
to come in and maybe drilling down into types of deals. Obviously LP LED deals I think were perhaps the driver for many, many years. We now have GP LEDs in the mix and maybe they're even more equalized. But sticking with LP LEDs for a moment, are you seeing LPs becoming, for lack of a better word, more sophisticated in the sense that they're just shopping infra only portfolios or do you still See sort of infrastakes being bunded or included as part of wider portfolios. How does that look like?
- [11:23]
C
We see both. We definitely see both. It's a big advantage to be able to work with our private credit secondaries team or our PE secondaries team, where we see very large portfolios that span the asset classes. And that kind of historically was where we saw most of our infrastructure deal flow come from. But you're exactly right. Are the LPs getting more sophisticated or is it sophisticated LPs selling? Probably a bit of both. But we are definitely seeing more sophisticated sellers coming to the market not because they have distress, not because they have to sell, but they see the market as a genuine liquidity solution to allow them to have flexibility in generating their own dpi, if that DPI has been slower, to allow them to recycle that capital in many cases into some of the themes that they really like and want to get exposure to today or to back new funds to allow them to get their co investment rights. Some of the interesting things that we've seen, not just portfolios coming to market, but some of the more sophisticated LPs who have very large infrastructure books are really opening up their books to the larger secondary players and saying, look, I want to achieve best value. You tell me how we can put 500 million, 800 million a billion, that's what I want to achieve. Maybe they've got a book of 3 to 5 billion and you can really then look to see and craft a deal that works for us as a secondary buyer that also achieves their objectives on pricing.
- [12:56]
B
Right, right. And I don't think we have a conversation on secondaries without touching on continuation funds for obvious reasons. And they seem to have exploded in popularity in recent years. I guess not without controversy, if you want to put it that way. Wanted to get your take. How are all parties feeling about continuation vehicles nowadays? You know, what's working, what needs improving? How do you feel about it?
- [13:21]
C
Yeah. So when this market really started to take off post 2021, we were so inundated with LP state deal flow. $8 billion plus portfolios coming in the first nine months. You know, really unprecedented. The large secondary players were already focused on this space. It was a buyer's market. High quality, able to buy in at a discount. It was pretty difficult to get the attention of these players for GP LEDs at that time. So a lot of GP LEDs were put on hold and have been put on hold for a number of years because you really do need to have A sophisticated player who can bring a lot of capital, but also really understands the asset class and understands how to structure a continuation vehicle or GP LED transaction. We've seen that pent up demand now starting to come and materialize in terms of deal flow. Yes, they can be controversial for sure, and they probably should be in some cases. I do talk about the good, the bad and the ugly. On the ugly side you can see historic transactions that may have been done purely to recycle LPs to get some votes achieved in favour of what a GP might want to achieve in their favour. Bad cvs I think are more around kind of the motivation being a little bit more GP LED rather than the fundamentals of the transaction. So for us, when we're looking at what's interesting in a GP LED or a CV from our side, the three key points, GP and asset quality, deal motivation and alignment. And I think if you can get those things right at headline level, you're a long way to having a good GP led. And a good GP LED should be a win win for both the existing investors in the fund and the incoming new secondary capital providers. And I think to put a little bit more color around this, we're really looking at kind of earlier in the life trophy assets. So GP led CVS 1.0 end of life assets that maybe they hadn't been able to sell, wanted to put another 10 years on those reset, try to earn some carry. Very different. Now what investors are focused on are some of these real star performers that have outperformed because of some of the tailwinds around data centers around power generation, renewables, logistics that have really benefited from the macro tailwinds, particularly in mid market funds, but not exclusively. They've grown so rapidly, there's still a lot of room to grow, but they need more capital to be able to achieve that business plan. That's the type of continuation vehicle that we've really been focusing in on and where we think we can find real value for our investors.
- [16:09]
B
You touched on something which I'm personally very curious about and I'd like your opinion on whether this is a good way to think about it or it makes sense. But in infrastructure I feel that CVS can make a lot of sense for some of the things you just said. Also given the longevity of the asset class. But do you find CVS are a better fit for infrastructure compared to other asset classes because of the infrastructure's characteristics or not so much?
- [16:35]
C
I think if you get the fundamentals right, the GP and the asset quality the deal motivation and the alignment of interest. CVs work well across all of the asset classes, whether it's private equity, private credit, real estate, or indeed infrastructure. But I do think at the moment that the CV market is being very beneficial for infrastructure because of these drivers, these real macro trend drivers that are creating real growth platforms. And what's very interesting is to be able to come in these growth platforms when they've already stabilized. So you're not taking a lot of that early stage growth risk. You're coming into a stabilized platform with a lot of future growth potential. And I do think that it's that more than necessarily the longevity of the asset life. And in fact we are seeing a lot of the CVs we invest into now having much shorter durations, maybe five or seven years compared to perhaps the 10 or 12 years you may have seen, you know, seven or eight years ago.
- [17:40]
B
I guess you've alluded to it, but I guess it's fair to assume that infrastructure or real asset TVs are benefiting from some of these macro trends, maybe at the expense of other kinds of PE focused TVs. Is that a fair assumption?
- [17:55]
C
Look, I think there's definitely different allocations for PE and infrastructure. So I don't necessarily see investors moving allocations from private equity into infrastructure. It's more investors moving infrastructure allocations or part of their infrastructure allocation from a direct fund into an infrastructure secondary fund, including those which have a focus on continuation vehicles.
- [18:23]
B
Yeah, and just one point I wanted to zoom in on. You mentioned giving a good description of a platform needing growth and CVS being a good way to kind of continue that growth. It makes sense. But I just want to take the devil's advocate position for a while when it comes to infrastructure because those who support longer fund structures or even open ended structures usually highlight that all of this is somewhat inefficient and costliness and some of these things are just. Some of these platforms should just be an open ended funds anyway because it's a much more natural home for it. And of course CVs provide a solution. But I'm curious what you think of the underlying argument that this is all a lot of work and costly work at that.
- [19:06]
C
Yeah, look, I think there is space in the market for longer dated and open ended funds, but equally not that many LPs want to have their capital tied up for 20, 25 or more years. And not all open ended funds ultimately provide the liquidity that investors expect when they want it. So the closed ended fund model is going to continue. There's huge demand for that length of fund life in the LP market. I think just going back to our earlier point around the type of continuations that investors are really focused on now. It's not so much about extending the life of the fund, it's more about being able to provide earlier stage boost of capital when funds have already reached their concentration limits or they've run out of capital to allow platforms which have exceeded expectations, real trophy assets, to allow those to grow. And that is not a fund life question. That's really around providing liquidity solutions to gps to allow them to optimize for the benefit of existing investors as well as the secondary investors.
- [20:16]
B
No, that makes sense. I mean, with all of this in mind, let me just prompt you. How large can infrastructure CVS get and what does that mean for existing dry powder?
- [20:27]
C
Yeah, so we're definitely seeing pent up demand coming through. A lot of very top tier GPS are starting to bring some very interesting opportunities to the market. These vehicles generally need a lot of capital and we're starting to see potentially sizes that are going to be in excess of 1 billion, maybe in excess of a couple of billion. These are very, very significant deals and will take up, you know, a fair chunk of the dry powder that's been raised for infrastructure secondaries in that particular year. So that then puts, I think further pressure on the supply demand balance in terms of what that means for pricing. As we come to the end of the year, we expect to see a, the usual surge in LP stake deal flow. If a lot of capital's already been used up with some of these very large continuation vehicles, obviously that then pushes a little bit more to a buyer's market.
- [21:21]
B
Okay, so I have a couple of last questions that I wanted to ask you, Andrea. One, I always find the secondaries market very inventive in terms of coming up with solutions. One thing I have heard of over the past year or something, and I want to find out if this even exists, is a trend or a proposed solution where secondaries buyers would approach, let's call them non traditional asset holders, so strategics or firms that have assets but they're not your traditional fund managers, but that the secondaries market was now eyeing these players and approaching them to set up structures to, you know, manage their assets and get liquidity into them. And I'm interested if you've come across this obviously in an infrastructure context and how you assess this trend, if we can call it that.
- [22:10]
C
Yeah, absolutely. You're spot on. Secondary players are definitely creative about how they can provide liquidity solutions to the market. This is what secondary capital is about. It's providing liquidity solutions into a market which at the moment is really booming because it's been very much starved of liquidity through the M and A and exit market. You know, LP state liquidity, traditional CV vehicles. We've seen as well an increase in GPS doing tender issues where they're working with a secondary player to manage to provide liquidity to their investors when they haven't been able to achieve as much through the M and A market. But equally going to kind of non traditional, non GP sources of infrastructure assets is equally valid. We have in the past worked on transactions where we've helped to establish funds through vehicles where there's been kind of balance sheet assets that we've been able to then put into a fund structure and provide the initial capital, and that in some cases has launched quite successful franchises going forward. I think as long as you have the asset quality and you can get comfortable around the quality of the manager of those vehicles, then creativity is to be applauded.
- [23:27]
B
Okay, and my last question is, we've spoken about how the market has changed, we spoken about how it's booming. What do you expect to happen in the next two to five years? How will this look like?
- [23:40]
C
Yeah, so I think, you know, where we are now in the infrastructure secondary market. You know, clearly it's starting to institutionalize, but it's still relatively underpenetrated. When you compare it to where private equity is now, we're looking a lot more like where private equity was 10 to 15 years ago. So still enough deal flow to be a functioning market, but relatively underpenetrated. So there's a lot of Runway to come in terms of institutionalizing the market, and there's a lot of growth to come just based on the underlying growth rates of what's happening in the fundraising in infrastructure funds. We're predicting the 50 billion of deal flow we're seeing today to be more like 70 billion in two or three years. So there's going to be a lot of growth and the market will become more institutionalized.
- [24:25]
B
I think that's a great place to end this on. Andrea, thank you very much for coming on the podcast.
- [24:30]
C
Thank you, Bruno. Appreciate the opportunity.
- [24:36]
A
That again was Andrea Ekberg, global head of Pantheon's infrastructure team. To hear more of our episodes, head over to infrastructureinvestor.com podcast or you can search and subscribe to the Infrastructure Investor podcast wherever you like to listen.