In a January blog post, “Secondaries: Really for real this time (it seems),” we noted that the long-anticipated coming-out party for real estate secondaries finally happened in 2013 with $5.1 billion in real estate secondaries transacted. But it seems that market forces may be pushing infrastructure secondaries to join the party too.
As Scott Chan, chief investment officer with the Sacramento (Calif.) Employees’ Retirement System, explained in a recent conversation:
“We think that, in the secondary market for infrastructure and energy, a classic supply/demand imbalance is forming. On the supply side, there should be a decent sized market considering that there has been maybe $300 billion raised over the last four or five years for infrastructure and energy funds and a certain percentage of that should be coming out to the secondary market. We also think that regulations are changing with regard to banking and insurance companies, which could lead to further supply. Additionally, there could be some mismatches in regards to LPs’ expectations and what gets delivered. I say that because we’ve interviewed a lot of primary funds, the GPs, and we think it’s an evolving space; we don’t think that it’s set in stone. So there could be a measure of disappointment and that could feed into a greater supply in the secondary market as well.
On the other end, on the demand side, we don’t think the main private equity funds are terribly interested in infrastructure because of the lower risk/return profile. Furthermore, you really need to understand how to value these assets, you need to have experience in the secondary market and sourcing, and we also think you need to have primary experience because you can better develop your network, triangulate the data and also be a natural buyer. Because, if you’re in the primary market, you’ll probably be thought of and contacted if there is an LP that wants to get out. It’s hard to find somebody with all of those elements — somebody with a ground-up experience of valuing these assets and who has that experience in both the secondary and primary markets — because you really need the expertise of the underlying asset classes or the asset. Especially considering that most secondaries have been through their investment period, so you’re just looking at the asset and saying, ‘What do we have on the books here? What are the characteristics? What are the risks?’
So we think that the demand side might be limited.”
SCERS recently committed $100 million to a separate account with Pantheon Ventures that is focused entirely on purchasing secondaries of infrastructure and energy partnerships. And research suggests they won’t be alone investing in the infrastructure secondary space — which saw $700 million in transactions during 2013 — as 30 percent of survey participants in Setter Capital’s Volume Report broadened their secondary focus to include alternative investment types during the second half of 2013, and approximately 24 percent of participants stated that they plan to broaden their secondary focus in 2014 to include buying alternative investment types.
Look for alternative secondaries to become a primary resource for institutional investors before long.
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Reg Clodfelter is a reporter with Institutional Real Estate, Inc.
