“I have had the opportunity to get to know and work with Niraj since early-2021. Niraj has a passion for real assets and this comes across in his interactions with GPs, LPs and others. His knowledge and understanding of the asset class has enabled him to provide valuable insight to the NJ real assets portfolio. I am confident that the value added by Niraj and the real assets team will continue to position the pension fund portfolio to benefit from the opportunity set while mitigating unwanted risks.”
—Shoaib Khan, Director & CIO, Division of Investment, State of New Jersey
The CHIEF INVESTMENT OFFICER Editorial Team shared a dozen questions with all our NextGen nominees and asked them each to pick six to answer. Their answers informed our decision to include them as a NextGen. Below are the answers from Niraj Agarwal.
CIO: What is the best way to bring more diversity to the financial industry?
Agarwal: Take action, as it all starts with one person taking action. And give it time. Don’t focus on adding or increasing diversity for diversity’s sake, as in the end, increasing diversity has to increase value as well. Do what you can within the possibilities of your own organization and in your network as a start. To me, diversity doesn’t just mean hiring and retaining team members of certain races, ethnicities, genders or other attributes, or seeking such team diversity in a GP you are considering partnering with. To me, diversity also means having team members who bring different viewpoints from their backgrounds and life experiences that lead to better relationships, investment decisionmaking and operations in an investment office.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Agarwal: Taking a cue from Nassim Taleb’s life’s work, I don’t think it’s possible to entirely avoid drawdown risk. Black and white swan events in our physical world, as well as in the investing world, do happen that we cannot always plan for. I do believe risk mitigation is critical to incorporate in an institutional portfolio, especially given New Jersey does take risk, and we expect to be compensated in terms of commensurate returns for taking that risk. Our portfolio is sizeable, and we have a long-term investing horizon as well. New Jersey uses a combination of risk mitigation strategies (tail-risk funds as one example) and a higher-than-usual cash balance, and that combination has performed very well since 2021, a time period when we have seen multiple macroeconomic and geopolitical shifts impacting the public and private markets. Additionally, I do believe real assets provide risk mitigation attributes to institutional portfolios.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional portfolios, and why?
Agarwal: While public equities and cash are critical to maintaining liquidity needs, I believe private markets as a whole and private equity, growth equity or venture, and the private equity or value-add end of real assets (with energy transition being part of all these asset classes) in particular, are most important for institutional portfolios. These areas are where I continue to see value creation, uncorrelated investments and returns, attractive alpha and deep relationships being generated. In the current and near-term environments, public equities could see higher volatility swings, which the private markets may experience as well, but potentially to a lesser degree. I have to also observe that the public and private sides are interlinked to a degree, and a great example of that is the growth equity area’s historical reliance on IPOs to effectuate exits.
CIO: What asset class or investment troubles you most right now, and why?
Agarwal: Private credit and real estate. I do expect interest rates to be higher for longer, but I also worry about the ability of the private credit asset class to consistently deploy at scale, given private credit solutions are sometimes too expensive for businesses to digest vs. their steady-state EBITDAs. I also worry about the current environment in which post-COVID covenant-light [debt] has not really been tested in the courts in a material way. Real estate is a very mature asset class and will survive the current reckoning, which is a rather material reckoning in my view. It’s the most democratic of the private asset classes, and I worry about the reliance of the real estate asset class on low interest rates and that we may very well still be in only the seventh inning of the reckoning. I am also worried about stranded-asset risk, as I have seen only a few institutional entities be able to offload truly distressed assets, and those exits had heavy write-downs.
CIO: What investing decision have you made for your organization that you’re most proud of?
Agarwal: The cleanup, turnaround and buildout of our real assets ex-real estate portfolio, as well as the pragmatism in the energy transition space. Taking the challenge head on, I conducted a comprehensive review of the book I inherited, spent time with the GPs that I didn’t know already, came up with a strategic plan, and I am in year four of executing that plan. Putting on a CIO hat in startup mode, I had to implement new processes and train staff, in addition to dealmaking. Taking an active management and private equity/growth equity view to the asset class was a deliberate investment decision when I started in 2021, and early wins were achieved through a combination of fixing errors in the book where possible, timely exiting certain public and private investments, restructuring underperforming separately managed accounts and tactically investing in GP-led secondaries. Today, I am actively deploying capital across funds, co-investments, co-underwrites and secondaries into areas of interest such as infrastructure, energy transition, as well as niche areas such as royalties globally. Delivering attractive returns, elevated distributions and reduced volatility since 2021, as well as my team being first call in the market for both household-names and first-timers, makes me extremely proud.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Agarwal: Pragmatism, empathy, the ability to make investment decisions based on imperfect information and keeping in touch with LPs outside of your LP type. As an execution-focused investor, I have seen pragmatism lead not only to better operations and execution, but also to taking advantage of resurgent areas that have fallen out of favor previously. Empathy leads to better relationships and trust within teams. Since I spend so much time in the private markets, more often than not I’m making decisions, both to invest and to exit, using a combination of qualitative and “people” skills, as well as quantitative skills. Keeping in touch with LPs beyond large pensions and sovereign funds has not only been helpful in making me a better investor but has also allowed me to give back to the community.
