The infrastructure secondaries market has undergone a transformation in recent years, serving as a portfolio management instrument for both fund investors and general partners, facilitating a consistent flow of assets for sale while managing aging portfolios. Industry analysts anticipate an increase in their utilization as investors seek efficient methods for exposure. 

Secondaries have emerged as highly coveted assets during market volatility, offering early exit options and diversity for portfolios. In the previous year’s elevated-interest climate, investors inundated the infrastructure market, resulting in a 51.9% year-on-year increase in secondary transactions within the inflation-hedging asset class, totaling $11.7 billion, as reported by Preqin. 

A “Surgical” Approach

Capital Innovations CIO, Michael Underhill, maintains a bullish view on the infrastructure secondaries market, but suggests investors take a “surgical” approach with regards to allocation upon review of current valuations. 

“The market experienced robust pricing throughout H12024, catalyzed by numerous pools of capital,” he said. “We estimate that non-traditional secondaries comprise approximately 70% to 80% of the market competing for high-quality supply.” 

Infrastructure secondaries appeal to investors for their inflation hedging capabilities, downside protection, stable and recurrent cash flows, and income production, which can be instantaneous due to the maturity of the portfolios.  

The rationale for the buyer is that it provides exposure to diversification and optimization, noted Underhill, with the ability to “backfill vintage years,” have shorter duration, access to liquidity, and mitigate the J-curve effect. 

For the seller, it allows managers to offer liquidity to their investors “while retaining control of their investments (non-traditional secondaries),” and “while allowing limited partners to generate realizations ahead of the natural termination date of their investments (traditional or LP secondaries),” added Underhill. 

Driving the Deals 

Furthermore, the increasing sophistication of infrastructure funds has prompted a surge in restructuring and portfolio rebalancing, acting as a fuel for increased secondary market activity. Investors, such as pension funds and sovereign wealth funds, are progressively leveraging the opportunity to acquire established infrastructure assets via the secondary market. 

The deal flow drivers this year has been “driven by continued secondary fundraising success, an influx of retail capital deployed via evergreen vehicles and traditional direct PE [private equity] investors participating on the buyside of the secondary market,” observed Underhill. 

Some of the more notable fundraises include a $700 million haul by Ares Management for its Secondaries Infrastructure Solutions III, which launched in 2023 and is aiming to raise $2 billion. That same year, Stafford Capital Partners raised $201 million for its fifth fund (SISF V), with a goal of raising over $1.4 billion. AXA IM Prime raised $467 million this year and is targeting $1.085 billion. 

“In today’s liquidity constrained environment, we expect investors to look to the secondaries market, whether on the LP-led secondaries side (potential portfolio rebalancing, fund re-ups, liquidity requirements etc.) or GP-led secondaries (to raise additional capital to fund the growth of underlying assets, fund concentrations, generate DPI etc.),” wrote AXA IM Prime analysts. 

Fastest-Growing Segment 

According to a report by BlackRock Infrastructure Solutions (BIS), infrastructure secondaries are the fastest-growing segment within the sector, with predicted annual volumes exceeding $25 billion by 2027. 

In the past decade, infrastructure primary funds have amassed a total of over $1 trillion. The report predicts that the value of infrastructure assets under management will be nearly $2 trillion by 2026. 

The report echoed Underhill’s observation that secondaries can mitigate the J-curve’s effect. “By acquiring stakes in established funds and assets, investors enter at a more mature phase of the investment lifecycle, while also potentially saving on fees and expenses charged in the early stages of a fund’s life,” Blackstone noted. 

Presently, infrastructure secondary volumes only account for between 1% and 2% of infrastructure assets under management, which BIS says is like that of private equity in the early 2000s and to real estate in 2015 to 2017. 

“Today, private equity secondaries volumes account for approximately 5% of private equity AUM, and real estate secondary volumes account for approximately 3% of AUM,” the report added.  

“Secondaries are taking off rapidly, with penetration rates just beginning to catch up to the levels seen in private equity in the early 2000s and transaction volumes expected to ascend to new heights in the coming years,” said Serge Lauper, global head and CIO, infrastructure solutions. “We see this as a great opportunity for infrastructure investors to broaden their exposure and find an attractive entry point within the asset class.” 

What’s Next? 

Looking ahead, the prospective growth of infrastructure secondaries is encouraging. As the infrastructure asset class continues to expand and diversify, with advancements in renewable energy, digital infrastructure, and transportation, opportunities for secondary transactions are expected to broaden. 

“More high-caliber secondary infrastructure investment opportunities have arisen in recent years as the economy, asset class and the structures supporting it have matured. So, compared to private equity, the opportunity set appears to be growing more quickly,” said Dominik von Scheven, managing director, Real Assets Investments, Hamilton Lane.