The plan — which targets the middle market — is to source transactions alongside mid-market GPs by offering the smaller deal originators an advisory service complemented by Brookfield’s capital deployment abilities.
Rather than focus on “LP-led” transactions, Brookfield executives have decided to expand into GP-originated deals, which are more asset-oriented and include processes for continuation funds, fund recapitalizations, among others, said John Stinebaugh, a managing partner who oversees the firm’s infrastructure debt funds and secondaries team.
“We view GP-led secondary transactions as being more similar to direct investing than traditional secondary deals,” said Stinebaugh in an interview to Infralogic. “In traditional secondaries transactions, you get limited, high-level information about the fund from the quarterly reports the LP receives from the sponsor. When you’re doing a GP-led deal, you have access to the GP itself, which has the information to do bottoms-up due diligence.”
GP-led transactions have become increasingly popular in recent years, reaching an estimated USD 63bn in deal value in 2021 across asset classes, according to a study by law firm Clifford Chance published in May. Infrastructure has been quick to follow suit with major assets like Stonepeak’s Cologix and Energy Capital Partners’ Calpine Corporation being transferred into continuation funds over the past few months.
Rather than just raising continuation funds for assets that it wants to hold onto, Brookfield is calling its plan a “sponsor solutions” secondaries strategy that encompasses much more.
“We’re not only coming up with potential solutions like Evercore or Jefferies would, but we’re investing the capital to put the solution into effect,” Stinebaugh explained.
Where before modest mid-market GPs were constrained by fund size, they may now have the chance to wade into larger deals because a partnership with Brookfield will allow smaller players to tap into the blue-chip investor’s capital, making up a considerable difference, explained Stinebaugh.
It would also grant the manager access to Brookfield’s underwriting capabilities, removing a daunting challenge some mid-market GPs face: soliciting outside investors for money as time winds down on a deal’s exclusivity status.
“Brookfield could even structure the capital so that part of it, maybe USD 50m, is available for LPs to come in as co-investors in the future,” added Stinebaugh.
Such a strategy will also allow Brookfield to avoid expenses that are tied to creating an entire support system of middle-market investing.
“To scale up a mid-market strategy, you're going to have to hire a lot of people, because you’re investing by definition in a lot of smaller deals,” said Stinebaugh. “Whereas what we're looking to do is work with mid-market sponsors that are already there who've got access to high-quality deal flow. And then we invest alongside them so that we're able to not only leverage their access to deal flow but their asset management capabilities. It’s much more resource-efficient than building out our own mid-market strategy.”
Conversely, other major managers, such as Antin and Stonepeak, are taking the more direct route to the middle market by raising such dedicated funds, without necessarily hiring new investment teams.
Other examples of what Brookfield could do through its infrastructure secondaries strategies include investing in a continuation fund, providing liquidity when a manager’s LPs want to cash out, or providing a manager with capital to facilitate the growth of one of its existing businesses, if it doesn’t have any more capital to invest in it.
The secondaries team will target geographies include Organisation for Economic Co-operation and Development member countries, with a focus on Europe and North America. The strategy will target a net IRR similar to one of its flagship infrastructure funds, which is 10% according to Infralogic data.
Equity checks will range between USD 100m and USD 500m. That allows Brookfield to gain access to the upper-mid market, which has been difficult in recent years given the size of its latest flagship funds.
Brookfield sees the infrastructure secondaries strategy as complementary to its infrastructure debt strategy, which is currently in the market with a third fund.
“The primary people we lend capital to are asset managers,” explained Stinebaugh. “It’s a way of broadening the suite of products that we've got that can help provide solutions for asset managers, so we can provide subordinated debt from one strategy, and preferred stock, structured equity and common equity from the other.”
The strategy has executed two deals so far: an investment in Global Infrastructure Partners-backed Enlink Midstream, of which it acquired USD 400m in convertible preferred stock, then putting back leverage on it, and the acquisition of a 20% minority interest in InterEnergy.
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