Infrastructure secondaries specialisation can unlock opportunities

9 April, 2025
By Wandy Hoh, Christian Simmons, Aizhan Meldebek

Executive summary

• Sourcing and identifying attractive opportunities in the private infrastructure secondaries markets requires a strong level of expertise and specialisation. The dispersion of historical returns within the private infrastructure asset class demonstrates that fund and asset selection is a key determinant of returns on both an internal rate of return (IRR) and multiple on invested capital (MOIC) basis.
• Purchasing infrastructure secondary assets at a discount to their net asset value (NAV) does not always guarantee success. Rather, it is important to focus on acquiring assets at a discount to their intrinsic value.
• The secondaries market presents opportunities for investors to gain immediate exposure to seasoned and high-quality infrastructure assets. There are several global macro themes including the growing need for digital infrastructure and power demand driven by data proliferation, as well as the development of non-traditional transport solutions that investors can gain exposure to through infrastructure secondaries investing.

Specialisation is critical to success: Importance of asset (and fund) selection

Infrastructure is widely regarded as an attractive asset class for its resilient properties, namely low correlation with other asset classes, high barriers to entry, and a high degree of contracted cash flows, among other characteristics.¹ However, as with many asset classes, there is a dispersion of returns that separates good investments from great investments, emphasising the importance of asset, fund and manager selection.

Figures 1 and 2 demonstrate the relative improvement of a median and 1st quartile fund for each vintage versus a 3rd quartile fund. For the purpose of this analysis, the data label above each bar is the net MOIC spread between each vintage’s 1st and 3rd quartile performance. The dark green bars are the delta between a 1st quartile and median return, and the light green bars represent the delta between the median return and a 3rd quartile return in each vintage. For example, in 2005, a 1st quartile fund had a net MOIC 1.4x higher than a 3rd quartile fund (2005 1st quartile return = 2.6x net MOIC vs 2005 3rd quartile return of 1.2x net MOIC).²

Figure 1:
Relative MOIC improvement of a median and 1st quartile fund (versus a 3rd quartile fund), of each vintage

The same methodology was applied to the IRRs in Figure 2. The dispersion of returns within the asset class demonstrates that fund selection, and more specifically asset selection, is paramount for returns on both an IRR and MOIC basis.

Figure 2:
Relative IRR improvement of median and 1st quartile fund (versus 3rd quartile fund), of each vintage

Buying infrastructure secondaries assets at a discount to NAV is not always a winning strategy

When evaluating infrastructure assets on the secondaries market, it is important to distinguish between acquiring assets at a discount to their NAV versus acquiring assets at a discount to their intrinsic value. While a discount to NAV might initially appear attractive, it does not necessarily guarantee a successful investment. NAV is ultimately up to the discretion of the underlying fund manager and can, therefore, deviate (based on different valuation methodologies) from intrinsic value.

In contrast, intrinsic value reflects the long-term worth of the asset, considering factors such as future cash flows, growth potential, and underlying risks – consistent with the approach that direct bidders will be taking down the road when the fund seeks liquidity. The appropriate level of expertise and experience to identify assets that are undervalued from an intrinsic or fundamental perspective can help better position an investor for strong risk-adjusted returns.

Figure 3 shows an illustrative example of two theoretical deals, one with a focus on a headline discount at entry and one focused on acquiring quality performing assets.

• Scenario 1, “Lower purchase price”: This illustrative scenario assumes a secondary investor acquires a portfolio at a 15% discount to the marked NAV. The investment generates an 8% go-forward IRR on its marked NAV. This is intended to illustrate an asset with an aggressive valuation and less value creation potential being bought at a headline discount.
• Scenario 2, “Higher purchase price + quality asset”: This illustrative scenario assumes a secondary investor acquires a portfolio at a 5% premium to the marked NAV (which we note is atypical as discounts are still the going rate in the market, according to many advisors³). The investment generates a 15% go-forward IRR on its marked NAV. This is intended to illustrate a high-quality asset that is more conservatively marked, but with greater value creation potential bought at a headline premium.

Despite attractive entry metrics for the “lower purchase price” scenario, this illustrative example suggests this effect is quickly negated, implying a strong discount may not be a substitute for investing in performing assets over the long haul.

Figure 3:
Illustrative scenarios – high discount versus quality assets

Deep asset class expertise: Seeing the whole picture

A deep understanding of the unique characteristics of each asset at a micro level while continuing to consider macro level trends can lead to more accurate valuations of infrastructure assets. This is where sector specialisation can be an advantage as infrastructure is often complex and nuanced. Infrastructure specialists bring invaluable expertise, enabling investors to navigate factors that vary significantly from region to region. For instance, the regulatory landscape, political climate, and economic conditions in North America differ markedly from those in Europe or Asia. Moreover, an extensive long-term and multi-cycle understanding of the business at play can enable an investor to efficiently navigate local market dynamics, such as the availability of resources, labour market conditions, and technological advancements, all of which can influence the success of infrastructure investments.

Infrastructure specialists (versus secondary generalists) can be relatively better equipped to assess these variables and devise strategies that mitigate risks and capitalise on opportunities specific to each business model and locale. Market insights ensure that investments are not only compliant with local regulations but also optimised for the unique demands and growth prospects of each market, which can lead to overall stronger investment outcomes.

Secondaries market opportunity set

The secondaries market can be an opportunity for investors to rapidly gain diversification across sector, vintage and geography while mitigating the J-curve. The current opportunity set for secondaries investors is historically strong as demand for liquidity across the board is elevated (transaction volume in FY 2024 was as high as $US160 billion across all asset classes⁴).

Due to a recent lacklustre M&A market, many general partners (GPs) have been unable to liquidate their holdings in high-quality assets, leaving a significant amount of NAV outstanding. Figure 4 illustrates the large outstanding balance of NAV in 2016-2020 vintage funds. We consider these vintages strong secondary targets and believe this chart underscores the potential in the space. This backlog of NAV potentially provides secondaries investors ample opportunities to selectively gain exposure to exciting infrastructure trends.

Figure 4:
Infrastructure unrealised value by fund vintage

Strong tailwinds behind infrastructure investments

US data centre market

The rapid increase in data generation and consumption has led to a significant rise in demand for data centres (Figure 5). This growth is driven by the increasing adoption of cloud computing, internet of things (IoT) devices, and the proliferation of data-intensive applications. The US is the largest data centre market globally and currently represents approximately 60% of globally installed data centre capacity. Going forward, the US data centre market is expected to continue on a strong growth trajectory, expanding at a compound annual growth rate (CAGR) of 21.6% between 2025 and 2028 (Figure 6).⁵

An exciting trend within data centres is the shift to “edge” data centres. Edge data centres, strategically located near the data source, process data locally and reduce the need for long-distance data transmission. This decentralisation not only enhances speed and efficiency but also improves data security and reliability. It is generally more economically viable (as well as easier logistically while providing operational flexibility for additional scale on demand) for hyperscalers to lease from colocation facilities on the edge than to own small-scale sites. We believe colocation data centres are favourably positioned to capitalise on the growing demand for edge data centres.

Figure 5:
US data centre market has experienced strong growth…

Figure 6:
…and is expected to continue on a strong growth trajectory

Power demand on the rise

Rapidly growing data centre development, a resurgence in energy-intensive US manufacturing, and the electrification of transport and heating are anticipated to drive significant electricity demand growth to levels not seen since the 1990s (Figure 7). Over the past two decades, electricity demand has been in a low-growth period (below 1% annually), however, the situation is rapidly changing. Data from Federal Energy Regulatory Commission (FERC) Form 714 in 2022 estimated five-year US peak load growth of about 23 gigawatts (GW). That estimated growth increased to 39 GW in 2023 and surged to 67 GW in 2024 (Figure 8).⁶ This implies that the nationwide forecast for electricity demand has risen sharply from 2.8% to 8.2% growth over the next five years.

In 2023, data centres accounted for 4% to 5% of US electricity consumption.⁷ This demand is expected to grow further due to the power requirements for artificial intelligence (AI) and complex large language models used by ChatGPT and similar applications. At the same time, manufacturing construction spending in 2023 was three times the average of the past decade. Protectionist policies have raised the cost of imported goods such as steel, aluminium, semiconductors and other components, further adding to the demand for US domestic manufacturing.⁸ In addition, the electrification of heating and transport are the other major drivers of US electricity demand growth. Altogether, this potentially provides compelling opportunities for infrastructure investors.

Figure 7:
Annual power demand growth is expected to reach levels not seen since 1990s

Figure 8:
The five-year load growth forecast increased from 23 GW to 67 GW

North American transport: Opportunities in traditional and non-traditional sectors

According to the American Society of Civil Engineers’ 2024 Bridging the Gap economic report, surface transportation needs over the 20 years from 2024 to 2043 total about $US6.7 trillion, representing the largest infrastructure needs among all infrastructure sectors. The report suggests that infrastructure investment gap may reach up to $US3.2 trillion⁹ (Figure 9). The gap creates an opportunity for private infrastructure investors across various subsectors. Historically, in the US, private transportation investments have concentrated in ports; however, going forward we may increasingly see opportunities in other sectors.

For example, we increasingly see opportunities in non-traditional transport infrastructure such as transportation leasing. Transportation leasing generally has strong infrastructure characteristics such as (i) long-lived assets (15-25 years), (ii) strong barriers to entry driven by established branch networks, (iii) acting as an essential service provider for logistics providers, and (iv) strong protection, in general, from contracted cash flows. This sub-segment could continue to benefit from the proliferation of ecommerce and consumption of goods.

Figure 9:
US surface transportation infrastructure gap

Key risks of investing in secondaries

The key risk factors of secondaries investments include:

• Less information transparency given the secondary nature of investment (often information is reserved for the primary investor only, and secondaries funds are restricted by confidentiality agreements in receiving asset-specific information).
• Potentially lower MOICs when compared with primary funds, resulting from shorter duration investments.
• Requirement to pay fees at the direct fund level and secondary fund level.

Notwithstanding these risk factors, the numerous benefits of infrastructure secondaries can potentially outweigh information asymmetry, and often pricing for secondaries takes into account fees from the direct fund.

Authors