II100: Argo’s less is more approach pays off

A limited LP base helps Argo to maintain close and longstanding relationships, Jason Zibarras and Melannie Pyzik tell us, as the firm enters our ranking straight to 45.

Jason Zibarras founded Argo in 2013 after spending six years at JP Morgan Asset Management

“We have kept a very low profile,” explains Argo Infrastructure Partners’ founding partner Jason Zibarras, a point illustrated by the fact that no phone number is listed on the firm’s website.

Still, that did not stop two institutional investors from tracking the team down and committing capital to Argo Infrastructure Partners III, the latest fund – or series as Argo refers to its investment vehicles – which closed in April on a little over $2 billion, double its original target.

Zibarras explains that a number of factors contributed to that fundraising success, achieved in the midst of the pandemic, including “a strong re-up rate, a solid track record and a pretty focused pre-marketing effort pre-covid”.

A strong re-up rate is key for Argo, whose approach is unique in that it seeks to limit the number of LPs investing in its funds.

“We don’t plan to have a fund of 30, 40 or 50 LPs,” says managing director Melannie Pyzik. “We want a manageable number of LPs where we can be an extension of their team.”

“For investors to get value out of core, they need gross tonnage, they need volume”

Jason Zibarras

“We started Argo in 2013,” Zibarras says. “And it wasn’t about coming up with a product, not just trying to sell a fund, but coming up with a better solution to meet a specific need. And that is: for investors to get value out of core, they need gross tonnage, they need volume. Our model provides this.”

Value of limited partnerships
The first series, which Zibarras describes as “an alliance with large institutions”, included the California State Teachers’ Retirement System and APG Asset Management, according to Infrastructure Investor data. That number increased to five in Series II and to 10 in Series III, which according to Zibarras, “is getting closer to the limit of how many investors we would take in a single series”.

Melannie Pyzik, based in Sydney, is managing director, a role she assumed in February 2019

Limiting the number of LPs in each series allows Argo to offer clients “a more tailored solution”, Pyzik says.

“We’re also able to accommodate levers for specific investor needs – for example, allocations, structuring and ESG,” she explains. “We offer a lot more flexibility to meet an investor’s needs versus say, a mega fund’s LPA and where it, necessarily, is a more binary choice – ie, taking it ‘off the shelf’ as is or don’t.”

Does having a limited number of LP clients mean maintaining future fund sizes at current levels?

“We’re not trying to hoover up the ocean in terms of capital,” Zibarras says. “In fact, quite the opposite.

“I would rather raise capital more frequently in shorter intervals, rather than having a wall of capital and then taking longer to deploy, because it does a disservice to our investors.

And when you consider that time is money too, getting invested is actually really important. In fact, it’s the most important thing to getting
time-effective, cost-effective exposure to higher-quality, lower-risk core assets.”

In sync with opportunities
Shorter fundraising and deployment cycles also allow the firm to be in sync with the opportunities available. “If you can go to an investor and say, ‘this is what is achievable in the market now, this is what we can deliver in 12-18 months’, you don’t end up explaining three years later why things changed,” Zibarras says. “That’s an important feature and difference in our model.”

Another result of Argo’s differentiated model, Pyzik notes, is that “it allows an investor to continue re-upping. It’s not an open-ended structure in the traditional sense, but with fundraising every two years, it allows that construct to evolve over time.

“We want a manageable number
of LPs where we can be an extension of their team”

Melannie Pyzik

“We’re a long-term investor so we don’t have the need to sell in year seven or year 10. Our minimum hold period is 15 years. And really, even in year 15, we can continue holding assets if we and our investors want to.”

The types of infrastructure Argo invests in are lower-risk, mature operational assets in the energy, utility, renewables, storage, transmission, transport, digital and water sectors across the US and Canada.

Another way in which Zibarras groups them is as contracted assets, regulated assets and concessions. The firm’s current portfolio comprises 16 investments, including five utilities, six contracted generation assets with a combined capacity of 2.5GW, two electrical transmission systems of 1GW and one energy storage network.

True to core
North American core infrastructure has been the firm’s exclusive focus since its inception. “The history of infrastructure in the US had a long link to traditional private equity and therefore a value-add strategy was generally what managers were offering versus a core strategy,” Pyzik says. “So, our core strategy was something that was differentiated and attractive to LPs even pre-pandemic.”

Core has become even more attractive since early 2020. Zibarras, who has spent many years explaining to clients the difference between core and non-core, says, “it’s going to be easier, in light of covid-19 impacts, to point at the stability benefits of core and, even more, the benefit of having scale in core. Because again, it doesn’t make much of a difference if only 2 percent of your portfolio is core and the other 98 percent is going all over the place”.

He says the challenge is quantifying the value of that: “From an investor perspective, IRR is the industry metric used to compare opportunities. However, it never gives you the whole risk-adjusted answer as to what the inherent value is of having an asset that doesn’t move with markets – that solid proposition, that inflation linkage. That doesn’t come out in the XIRR calculator.”

So, is there a metric that does?

“For core investing, in addition to valuation stability in the storm, one thing that’s real is yield,” Zibarras says. “Cash is a real metric. The drawback with measuring long-term core investing is it takes time.”