Arjun’s Toor: ‘For our 2020 vintage, the inflation protection has pretty much come out as 1:1’

Founding partner Surinder Toor on why the manager looks to remain independent, fundraising, and the merits of ‘forever assets’.

Having hit the headlines a couple of months ago on speculation over whether it would stay independent, Arjun Infrastructure Partners insists that no change to its leadership or operating model is afoot. Instead, the manager is looking ahead to a final close for its second flagship fund, the launch of a third, and is considering the merits of ‘forever assets’.

“Compared to this time last year, we are feeling quite positive about capital raising and how the portfolio has performed well and delivered target returns in a testing environment,” Surinder Toor, Arjun’s founding and managing partner, told Infrastructure Investor. “People are back to work and back to due diligence, and we will have a second close for our second fund before Christmas, touch wood.”

Arjun is looking to launch a third flagship in the second half of 2024 with a target of €2.5 billion, but first there is the issue of its second fund, the Infrastructure Alliance Europe Fund II, which is targeting €1.5 billion. “We have extended the deadline for final close to the end of Q1 next year [for Fund II]. As everyone raising capital has experienced over the past nine months, it has been a difficult environment,” said Toor.

The institutional investor pool for the second flagship will be larger and more geographically spread than for the predecessor fund, and some investors will be new to the asset class as time and the times have been on co-mingled funds’ side. Some investors are turning from funds-of funds towards single-managed core and core-plus strategies, as they see less need for diversification because the asset class is buoyed by long-term fixed-rate financings and tangible assets.

“These investors have seen infrastructure do what it’s meant to do. And they’ve also seen that the diversification in the fund of funds approach is not needed in infrastructure and certainly not in core, core-plus infrastructure,” explained Toor. “So, why have another drag on net returns through that fund of funds structure?”

Another attractive feature for investors is Arjun’s Europe and mid-market focus. “We’re benefiting from those who had invested earlier in Europe and whose managers have gotten to a size where it’s difficult to argue that they’re still in the mid-market. The question for investors is then whether they want to invest in €35 billion-plus managers or stay in a market where they have had good results historically.”

Size matters

The size of managers has come to the fore this year with independent smaller outfits being picked up at a fast pace. Toor confirmed that approaches have been made and framed it as a testament to the team and the quality of the assets in the portfolio: “For ourselves, that strong inflation protection has come through. For our 2020 vintage, the inflation protection has pretty much come out as one-to-one, which has acted as a significant proof [of] statement of the role of real infrastructure within an investor’s portfolio.”

Though discount rates have moved up and valuations down, “the inflation protection has been three or four times stronger than the impact of the cost of debt movement on re-financing assumptions”. And this is not just on regulated or feed-in tariff assets, Toor noted.

“The pricing at the airports and the pricing on the motorways are at a fixed premium to the high street. And in September, we could see almost eight percent coming through with a small lag on the price per unit on the transaction values for food and beverages on our motorway and highway services assets.”

Arjun’s second flagship fund has a holding period of 15 years with five yearly extensions. This is far from the usual fare in infrastructure, but preferable to open-ended, argued Toor.

“With open-ended infrastructure it is difficult to have capital to deploy, even with capital raising, because you’re always trying to redeem. On the other hand, we’ve had this as feedback from investors [in closed-end 10-year funds] that capital is not being returned as quickly as they’d expected, which then has an impact on new commitments.”

“It’s almost a narrower subset of the open-ended appetite that we’re addressing,” he added.

The closed-end fund structure also allows for diversification of vintage and that matters just now. “If you’ve been successful in an open-ended vehicle and you’re at €30 billion to €40 billion, the tail is so much bigger than the new investments that LPs won’t benefit from the higher returns we’re now seeing. For investments made in the last six, nine months, you’re certainly seeing better nominal returns than for quite a period.”

Finding ‘forever assets’

Forever is a mighty long time, but the idea of ‘forever assets’ is at the heart of Arjun’s strategy and adaptability. Toor mentioned utility-style assets as the obvious candidates but wants to include renewables too:

“Even renewable assets – which traditionally were thought of as finite-life assets, or certainly underwritten in that way – people are repowering [them]. And though it might not be the same physical panel or turbine blade, you’ve got the site and the grid connection, and you will likely have ‘forever assets’.

“On the transportation side, if you look at ports and airports, there might be changes in patterns of travel and patterns of where goods are manufactured and where they’re distributed to, but those port assets – particularly if they’re freehold-owned rather than concessions – are attractive forever.”

As Arjun hopes to ride out the storm under their own steam, Toor said they are making the most of the opportunities available.

“We were lucky in terms of the timing of our first close on the second fund being before last summer, because it meant we then had dry powder and have made four investments in the last 12 months. So that’s been quite opportune.”