Liquidity solutions:
Playing a key role in infrastructure portfolios
Liquidity solutions: Playing a key role in infrastructure portfolios
Liquidity solutions, mainly secondary transactions, are increasingly playing a meaningful role in well diversified infrastructure portfolios. Infrastructure liquidity solutions, while still small in market share, have been on a steady ascent since 2015, with infrastructure secondary volumes reaching $4.9 billion in 2021, a 139% increase year over year.² Liquidity solutions offer a customized opportunity for managers in comparison to a traditional sale, and can provide managers the additional time and capital to position assets for future growth. Driven in part by the duration mismatch between long-dated infrastructure assets and closed-ended infrastructure vehicles, managers are choosing to hold onto their best infrastructure assets for longer periods, and many are utilizing continuation vehicles to help facilitate liquidity.
For investors, liquidity solutions provide access to an increasing number of off market infrastructure assets that are not trading on the open mergers and acquisitions market. There is also the opportunity to acquire infrastructure assets at a discount to fair market value, which can provide J-curve mitigation, an immediate valuation uplift, and potentially improved returns with an increased ability to meet benchmarks.
² Setter Capital, Volume Report FY 2021.
The quantifiable benefits of secondaries: Illustrative uplift and returns over time
Key assumptions:
- Purchase price discount of 10% relative to NAV, consistent with seed portfolio.
- Portfolio appreciation of 5% uplift based on a 6-month closing period and 10.4% overall asset level return.
- Long-term return target of 10.4% at asset level which results in an approximate 11% deal level return when the discount is factored in (consistent with stated return target).
Sustainable tailwinds for Infrastructure Investing
Private markets reached an important inflection point in 2021, eclipsing the capital raised through public market IPOs for the first time in history.³ The transformation within private markets is creating a far stronger ecosystem and pipeline for private core and core plus infrastructure that is being complemented by several other tailwinds. Preqin predicts that private infrastructure AUM will reach $1.9 trillion by 2026, overtaking real estate to become the largest real asset class.⁴
Technology and Basic Goods Beyond the broad market trends, infrastructure as an asset class has been thrust into the spotlight as new digital and remote modes of operation provide daily reminders of just how impactful these assets can be, and how they can serve to promote or constrain output and productivity. This has pushed a broader reshaping of what we define as life’s essential services, including the elevated demand for digital communications like Zoom or Microsoft Teams. Near-term, significant investment by private infrastructure investors in fiber, communication towers, and data centers will be needed to support the increasing data demands.
Energy Transition and Renewable Power The energy transition shift away from conventional hydrocarbon generation to renewable power is an additional potential tailwind that will require significant capital, and another area where private infrastructure will continue to play an important role. Greener strategies are all adding to infrastructure’s continued momentum and providing exciting investment opportunities for core and core plus infrastructure investors – including electricity networks with smart grid technology, transportation infrastructure upgrades that reduce carbon footprints, and the growing electrical vehicle charging infrastructure.
Infrastructure Spending Although infrastructure spending varies across countries, it averages approximately 10% of GDP – well below what is needed to effectively sustain economic function or create vibrant economic growth. The same research confirms the inexorable link between infrastructure spending and growth, noting that every dollar spent on infrastructure brings a commensurate potential $3 uptick to GDP.⁵ In a post-pandemic environment, private investors are expected to play a larger role working alongside different levels of government that may choose to privatize assets to shore up balance sheets or implement new public-private partnership (PPPs) programs.
³ Dealogic and Reuters, data as of December 6, 2021.
⁴ Preqin , Alternatives in 2022.
⁵ Council on Foreign Relations, The State of US Infrastructure, November 8, 2021.
Looking ahead
Core and core plus infrastructure assets are increasingly providing longer-term investors access to inflation-protected yields and a pathway to potentially capitalize on the many tailwinds coalescing within the infrastructure opportunity set.
As investors actively reposition their portfolios to navigate the new normal in asset markets, core and core plus infrastructure is offering the opportunity to potentially capture higher returns with less volatility than those currently available within the public fixed income market. For long-term investors, core and core plus strategies are standing out as both a timely and increasingly flexible springboard for realigning portfolios into competitively performing income strategies. At the same time, these trends are driving a deeper focus on innovative investing for the good of our planet.