The Opportunity of Secondaries in Infrastructure: Unlocking Liquidity and Growth Potential

The infrastructure investment landscape has evolved significantly in recent years, with secondary markets playing an increasingly important role. Secondary infrastructure transactions refer to the buying and selling of existing infrastructure assets or stakes in infrastructure funds, as opposed to direct investments in new projects (primary markets). These markets offer investors a variety of opportunities to unlock liquidity, manage portfolios, and achieve attractive risk-adjusted returns. In the context of global economic trends, such as inflationary pressures, aging infrastructure, and the push for green energy, secondaries in infrastructure are gaining momentum.

 

Infrastructure as an Asset Class

Infrastructure assets—roads, airports, utilities, energy grids, and social infrastructure—are essential for economic development. As countries prioritize growth and sustainability, the need for investment in infrastructure has soared. According to the Global Infrastructure Hub, there is an estimated $94 trillion global infrastructure investment need by 2040, driven by population growth, urbanization, and climate change initiatives. However, traditional financing sources, such as government funding, cannot bridge this gap alone.


In response, private investors have entered the infrastructure sector in significant numbers. Pension funds, sovereign wealth funds, insurance companies, and private equity firms are allocating more capital to infrastructure, attracted by its long-term stable cash flows, inflation-hedging characteristics, and ability to diversify portfolios. However, as infrastructure portfolios mature and economic conditions shift, the secondary market has emerged as a key avenue for both asset holders and new investors.

 

Growing Demand for Liquidity

A primary driver for secondaries in infrastructure is the growing demand for liquidity. Infrastructure investments are typically long-term, illiquid, and require substantial capital. Many investors, particularly institutional ones, are increasingly seeking ways to manage their portfolios more dynamically. This is where the secondary market comes into play. 


For investors looking to exit their positions—either to free up capital for other investments, rebalance portfolios, or meet regulatory requirements—selling their stakes in existing infrastructure assets or funds through the secondary market offers a practical solution. 


On the flip side, buyers in the secondary market have the opportunity to invest in fully operational, cash-generating assets, often at a discount to net asset value (NAV). This allows them to bypass the development and construction risks associated with primary infrastructure investments and to tap into a pipeline of mature assets that already have an established track record.

Market Growth and Key Drivers

The infrastructure secondaries market has seen notable growth over the past decade. According to Preqin, infrastructure secondary transactions represented nearly 10% of all secondary market deals in 2022, up from around 5% in 2015. The global market for infrastructure secondaries is estimated to be valued at over $15 billion annually as of 2023, with continued growth expected as more institutional investors engage in the space.

 

Several factors contribute to this upward trajectory:

  1. Aging Infrastructure Funds: Many infrastructure funds launched in the mid-2000s are nearing the end of their investment cycles. Investors are increasingly seeking liquidity as these funds approach their “harvest” periods. Secondary markets provide an exit option for investors in these older funds.
  2. Regulatory Changes: Regulatory frameworks, such as Basel III and Solvency II, have put pressure on banks and insurance companies to reduce risk-weighted assets, including long-term infrastructure holdings. This has fueled the demand for secondary transactions as these institutions look to offload infrastructure assets to meet capital requirements.
  3. Green Energy Transition: The global shift towards clean energy and decarbonization is transforming the infrastructure investment landscape. According to the International Energy Agency (IEA), achieving net-zero emissions by 2050 requires annual infrastructure investments in renewable energy to exceed $4 trillion by 2030. As renewable energy assets mature, they increasingly enter the secondary market, offering investors the chance to acquire established assets in the green energy space.
  4. Inflation and Interest Rate Environment: In a high-inflation, rising interest rate environment, infrastructure investments—particularly those with inflation-linked revenue streams—become more attractive. The secondary market allows investors to access inflation-protected assets without the development risks, adding an additional layer of appeal during periods of economic uncertainty.

 

Risks and Challenges

While the secondary market in infrastructure offers significant opportunities, it is not without challenges. One major risk is the illiquidity of infrastructure assets, which can lead to longer transaction times and difficulties in finding the right buyer or seller. This is compounded by the bespoke nature of infrastructure investments, where assets are often highly specialized and require extensive due diligence.

 

Valuation is another key challenge in infrastructure secondaries. Since many infrastructure assets are held in private markets, determining fair market value can be complex. Assets may be valued at a premium or discount to NAV depending on factors such as asset age, revenue stability, and macroeconomic conditions.

 

Additionally, buyers must be cautious of potential regulatory and environmental risks, particularly as governments push for tighter environmental, social, and governance (ESG) standards. Infrastructure assets, especially those in sectors like energy or transportation, may face increased scrutiny and regulatory changes that could impact returns.

 

The Future of Infrastructure Secondaries

The future for secondaries in infrastructure looks promising. The continued push for sustainability, particularly through renewable energy and green infrastructure, is expected to drive further growth in the secondary market. Investors seeking ESG-aligned assets can increasingly turn to the secondary market as a source of green, operational infrastructure projects.

Moreover, as infrastructure funds continue to grow in size and number, liquidity solutions will become even more critical. Secondary market platforms are likely to evolve, becoming more efficient and transparent, enabling investors to trade infrastructure assets with greater ease.

In conclusion, secondaries in infrastructure present a dynamic and growing opportunity for investors. They offer a way to unlock liquidity, acquire mature assets, and diversify portfolios while mitigating risks associated with primary infrastructure investments. As the infrastructure sector continues to expand and evolve, secondaries are poised to play a key role in shaping the future of global infrastructure finance.

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