New York-headquartered asset manager BlackRock has just launched a white paper entitled “Taking off” which analyzes the potential for growth in the infrastructure secondary market.

BlackRock has issued a new report co-authored by Serge Lauper, global head and chief investment officer, and Jérôme Leyvigne, head of secondaries and co-head of EMEA at BlackRock infrastructure solutions. The report looks at the factors causing infrastructure secondaries’ expansion and why it is now a growing segment within infrastructure, with annual volumes expected to rise beyond $25 billion by 2027.

According to BlackRock, secondaries can provide portfolio benefits to investors including diversification, potential J-curve mitigation, strong risk-adjusted returns, and act as a liquidity and portfolio management tool.

(The J-curve reflects an investment having negative returns at first for a period of time, before entering a period of recovery.)

In addition to the benefits of secondaries, infrastructure secondaries offer additional benefits including inflation hedging, downside protection, resilient and recurring cash flows, and yield generation, the firm said in a statement.

The infrastructure secondary market is also considered undercapitalized with buyer-friendly dynamics, particularly for mid-size transactions which are often unnoticed.

“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,” Lauper said. “We see this as a great opportunity for infrastructure investors to broaden their exposure and find an attractive entry point within the asset class.” 

“Infrastructure primaries of today are the secondaries of tomorrow. Infrastructure secondary volumes currently only account for 1 to 2 per cent of infrastructure [assets under management] AuM. This undercapitalization has created buyer-friendly dynamics, particularly for mid-size transactions which often fly under the radar. As these conditions persist, we anticipate secondary buyers will continue to be presented with attractive investments at compelling prices,” Leyvigne added. 

Despite strong historical growth, infrastructure secondary volumes only account for 1 to 2 per cent of infrastructure AuM. This penetration is similar to that of private equity in the early 2000s and to real estate from 2015 to 2017. Today, private equity secondaries volumes account for ~5 per cent of private equity AuM, and real estate secondary volumes account for ~3 per cent of AuM, the firm said.

Access to data and technology is critical and provides a distinctive edge in secondaries dealmaking. Limited partner-led auction processes typically provide very little point-in-time information to bidders with short transaction timelines. As a result, buyers who have access to existing historical data can gain an edge in underwriting secondaries efficiently and accurately, the firm added.