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Niraj Agarwal, Head of Real Assets, New Jersey Division of Investment

Institutional Investor • 10 August 2023

Alpha Edge Recognition - Real Assets

This year, Allocator Intel is recognizing leaders in the allocator community, acknowledged by their peers, for exceptional leadership in the key areas of portfolio construction in the Alpha Edge Recognition Awards.

Nominated for Real Assets, Niraj Agarwal, CFA, is Head of Real Assets at the New Jersey Division of Investment. When he joined the $90 billion public pension fund in Trenton almost three years ago, he shrunk the legacy oil & gas, metals & mining exposures from about 70% to 25% and built the portfolio’s infrastructure, energy transition and sustainability positions from scratch. For the fiscal year ending on June 30, 2022, the net internal rate of return of his real-assets portfolio, the best-performing asset class in the pension fund, was about 16%.

Niraj earned a Bachelor of Science and an MBA, both from the Kelley School of Business at Indiana University. After two stints in investment banking, at Stifel Nicolaus and CastleOak Securities, he joined the LP side: He spent almost six years as a Portfolio Manager in the Real Assets team at CalPERS, then joined the New Jersey Division of Investment in January 2021 in his current role.

The following is edited for length and clarity.

Let’s start with you sharing an overview of your role.

New Jersey’s pension AUM today is about $90 billion: 11% is allocated to what our regulation defines and what the market understands as real assets, so real assets for us is a broad, broad mandate. Our regulatory definition includes real estate, infrastructure, and natural resources, as well as more niche areas (such as student housing, agriculture, sports teams, music royalties). You can think of that 11% as 8% real estate and 3% real assets ex-real estate; this 3% can go up to 5%.

We access the market through commingled funds, co-investments, co-underwrites, secondaries, and programmatic separate accounts. At this point in time, all of our private asset classes are under-allocated, and we are particularly looking at private credit and real assets for new capital deployment.

What have been some of the more significant changes over the last year?

The first response is, there have been quite a few changes. At the total fund level, one change to highlight is, since late 2020, we’ve had many new faces joining the investment team here, including myself, and some team members have left for other opportunities. We’re currently working in a hybrid setup out of our headquarters in Trenton, and because of the new faces, team dynamics continue to evolve.

We continue to improve within the confines of the U.S. pension fund, and we’ve developed a number of investment and monitoring processes that didn’t exist in the past. There’s change happening at the total fund level.

At the individual portfolio level, real assets  ex-real estate is where a lot of turnaround has taken place and has been successful. I took over in 2021, and what I inherited was an underperforming portfolio that was overlooked and composed largely of legacy oil & gas, metals & mining investments. At this point today, I continue to shed a lot of this legacy weight which involves restructuring SMAs/JVs as well, and I continue to build up the infrastructure, energy transition and sustainability positions from scratch. I take a private equity approach to real assets and have a particular interest in the energy-transition space. It’s very topical of course.

The portfolio was 70% to 80% conventional energy and metals & mining, and that’s now down to 25% to 30%. All of those proceeds have been invested in infrastructure/energy transition; about $1.5 billion of new investments towards infrastructure, energy transition and sustainability. 

My portfolio delivered a net 16% IRR for the fiscal year ending on June 30, 2022, and we were the best-performing asset class in the entire pension fund. I think this area of real assets can deliver these kinds of returns long term while providing downside protection, and this is topical in this macro environment of recession uncertainty and inflation. 

What factors influence you most when evaluating opportunities in the investment space?

We’re in a very, very interesting market right now. The investments I’m evaluating are with partners that play in traditional private equity strategies that span buyouts, growth, and venture, or with partners that play in traditional private credit. One of my focus areas is understanding what I’m investing in and whether that aligns with the portfolio I’m buildingThis is particularly applicable to the energy transition and digital infrastructure arenas. 

Once I make this assessment, some of the factors to highlight are expected returns and assessing "Is the return commensurate with the expected risk that you're taking on?". Then you have to assess drawdown potential along with deal attribution. We want to assess underwriting rigor. We’ve seen GPs being very acquisitive recently, so we want to assess conservativism and rigor in the underwriting process. Last but not least: team credibility, which is as important as track record, deal pipeline and fees.

What influences you in terms of evaluating an opportunity?

In the real assets ex-real estate part of our portfolio, practically all the partnerships are foundational and strategic, and so there are four areas which stand out:

The first one is the track record of the stated strategy; the second is senior- or founder-level engagement with me and my team; third is alignment on a number of areas which include fees; and last but not the least is the ability to see a lot of deal flow.

There are not many partners in the world who can offer all four of these, so when someone is able to offer all four of these in a credible way, that gets my attention.

In the next 12 to 18 months, what are some of the investments you are looking at?

Co-investments, co-underwrites, and secondaries across infrastructure and other real assets while we continue to look at primary funds.

This focus allows me to be strategic with my chosen partners and also to be tactical in a market reality where primary fundraising has been going slower than usual for our partners. 

What are some of the challenges that you anticipate over the next few years?

The biggest challenge is execution. There’s no dearth of attractive opportunities that my team can underwrite, but all that momentum is lost if we cannot close on that investment.

Another challenge, though, is talent: I’ve shared that our team looks different than it did three years ago. Good talent is really tough to attract in this market: You want team members who are commercial but can stay long enough for the office to maintain institutional memory rooted in fact.

What would you say is your greatest accomplishment?

I would say the cleanup, turnaround and buildout of our real assets ex-real estate portfolio into an accretive asset class for the total fund, as well as the pragmatism and thought leadership in the energy transition space. I thought the opportunity set was much broader than contracted solar/wind farms, so I actively deployed capital toward that thought, and we’ve been rewarded. Apart from the turnaround of this portfolio, I think my biggest accomplishment is taking a big view towards energy.

What do you do in your spare time?

When I’m not on my hyper commute to Trenton, I’m spending time with my family: I have a 2-year-old at home. 

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