Commitment to infrastructure secondaries

Since its first infrastructure secondaries fund was launched in 2012, Stafford has maintained a high level of conviction in core infrastructure secondaries as the preferred investment strategy in this sector. In the present investment climate where a number of asset classes face volatility from rising inflation and interest rates, we remain bullish on infrastructure and secondaries in particular.

Infrastructure secondaries have resilience to rising rates and inflation as, in most cases

1. The cash flows of the underlying assets are inflation protected

2. The purchase price of assets in secondaries transactions reflects current rates and inflation expectations

3. Secondary markets in general see increased volumes in periods of macro market volatility as investors adjust exposures.

Stafford Infrastructure’s investment process begins with an analysis of a universe of funds and their underlying assets. We apply a nine-factor risk model to assess a discount rate each asset of an infrastructure fund, through which we can determine a fund’s risk sensitivities to factors such as inflation. Figure 15 illustrates an example of this process. Stafford regards a discount rate of 10% as the borderline between a core or core+/value added investment. A DCF of 9% suggests a strong core infrastructure exposure. For risks such as inflation, we look specifically at the combination of specific assessment of factors including Counterparty, Contract, Revenue and Financing risks.

These risk scores form the basis of our portfolio construction models. We regularly test these scores both through peer asset comparisons and through broader surveys with our managers. The above inflation survey focused in inflation sensitivity is our most recent example and follows a prior survey of all our managers in 2020 looking at potential changes in the context of the arrival of COVID.

In addition to the inflation specific benefits as mentioned above, investors in secondaries funds enjoy additional advantages. These include the absence of J-curve, a high level of asset visibility, important both at a transaction specific and portfolio construction level, and an externally valued portfolio. However, rising inflation presents one specific downside risk to all asset classes; the potential for multiple compression as funds seek to exit assets through either a GP-led transaction, trade sale, or IPO. We have tracked trends in asset realizations closely since the inception of the SISF strategies and have not seen evidence of multiple compression.

The above chart illustrates the demand for core infrastructure assets in recent years. These are the exits seen in the infrastructure funds in which Stafford has invested. Across these exits we have seen an average realized premium of 24% relative to the reported NAV 12 months prior to the sale.

While some multiple compression may be seen particularly for infrastructure assets defined as Opportunistic, our expectation is that premiums at these levels will continue in the medium term. We expect this will be driven by continued asset allocation to infrastructure’s defensive characteristics including strong inflation protection. In 2021, new primary fund raising reached another record level at USD123 billion, further increasing the estimated level of dry powder to USD282 billion.[8]

[8] Data as of Feb-2022; source: Preqin, Infrastructure Investor, Stafford