Adapting to a new world

LPs are recalibrating their allocations as they navigate a volatile macroeconomic and

geopolitical environment, says Arjun Infrastructure Partners’ Surinder Toor

As geopolitical events and technological advances drive investment megatrends, limited partners have found they must adapt their investment strategy to avoid drifting returns and elevated risk

For example, many of the largest infrastructure managers have deployed aggressively in digital and renewables in recent years, leaving investors overweight to certain sectors, even while ostensibly committing to generalist vehicles. This is one reason for a rebound in appetite for mid-market strategies, coupled with more attractive competitive dynamics.

Meanwhile, LP appetite is also shifting when it comes to risk profile. Interest in core funds, in particular, has returned now that higher interest rates mean it is possible to achieve double digit returns without straying from a conservative definition of infrastructure. Finally, LPs are refocusing their attentions on Europe, as a depreciating dollar and a volatile political and regulatory environment mean the US is no longer seen as an obvious safe harbour.

Surinder Toor, founder and managing partner of Arjun Infrastructure Partners, discusses the impact of all these factors.

Q How would you describe LP appetite for core/coreplus infrastructure relative to value-add?

We’ve seen a significant increase in appetite for core/core plus strategies, largely as a result of the correction in rates that took place from mid-2022 onwards. Infrastructure was always intended to be a somewhat defensive asset class – targeting low-risk, essential assets that are uncorrelated to wider markets. However, in the decade prior to 2022, it was very difficult to stick within those parameters and achieve double-digit returns. Many LPs therefore followed the majority of GPs up the risk spectrum.

Over the course of the past three years, however, as the risk-free rate has increased, investors are once again getting comfortable with the idea that it’s possible to achieve double-digit returns from core/core-plus infrastructure. That’s undoubtedly driven a surge in appetite.

If you can generate a net return of 11 or 12 percent by investing in assets with traditional infrastructure risk characteristics, why would you put all of your allocation into those mega-managers that have moved up the risk curve towards private equity over the years? We’re starting to see this type of thinking playing out in investor decision-making, and that’s boosting demand for core/core-plus strategies.

Q Is this shift towards core therefore also coinciding with a shift towards the midmarket?

We’re definitely seeing increased appetite for the mid-market relative to the large-cap space. Part of the reason, I believe, is to do with access to co-investment. We’re increasingly hearing from LPs that say they’re not being offered the co-investment flow that they’re looking for from the big GPs. Or else, that they’re only being offered co-investment in data centres and renewables where they’re not looking to add any additional exposure.

Indeed, many LPs are now finding themselves overweight to digital and renewables because while they’ve theoretically committed to funds managed by large generalist managers. Those managers have been so successful in raising capital that they’ve gravitated heavily to sectors where it’s been possible to deploy at scale, most notably North American data centres.

In addition, investors increasingly recognise that the large-cap market is overly competed at an asset level in a way that the mid-market is not. For all of these reasons, many of the largest LPs globally are intuitively feeling that there are better risk-adjusted opportunities to be found further down the size spectrum. We’re therefore seeing more LP interest in the mid-market than at any point over the past decade.

Q Is the market moving away from a sector specialist approach more generally?

Whenever new sectors emerge, for example renewables 15 or 20 years ago, you start with the strategics. Utilities were the original de facto renewables developers, for example. Then you start to see standalone, specialist funds being raised. In time, however, those sectors become mainstream. Most, if not all, generalist managers now have investments in the renewables space.

That same evolution has played out in digital infrastructure as well, although over an even shorter time period. There are a small handful of specialist digital infrastructure GPs. But now the majority of generalist infrastructure managers have gone into data centres. At some point, the market gets comfortable with a new sector and it becomes an established generalist vertical.

“If you can generate a net return of 11 percent by investing in assets with traditional infrastructure risk characteristics, why would you… move up the risk curve towards private equity?”

Q How would you describe LP appetite for Europe, relative to other geographies?

The current geopolitical environment is working to Europe’s advantage. We brought our first US and Canadian investors into our latest fund in the last quarter of last year. On a relative basis, Europe offers greater regulatory and political stability. This is particularly evident in the realm of renewables.

Furthermore, the dollar has depreciated by between 12 and 13 percent over the past year. That’s another tailwind benefiting Europe. Finally, I would add that there’s simply more subsector diversification to be found in European infrastructure. For example, you can invest in airports or passenger rolling stock in a way that’s typically not possible in the US, where the infrastructure landscape is dominated by digital and energy.

Q You have spoken about the prevalence of data centre opportunities. Is that not more of a large-cap play?

There are data centre opportunities out there for everyone. Just as I described in the renewables space, we’re seeing the large-scale developers of data centres now actively selling them down once facilities are built and contracted, and then using the proceeds to fund further development. That’s generating deal flow for mid-market players that might not have the capacity to build large data centre portfolios themselves.

These stabilised data centres can enjoy the same characteristics of core infrastructure with the right contractual arrangements and counterparties versus the private equity risk profile of the developers.

Q Which sectors within the broad mix that Europe offers are currently proving to be most attractive?

It’s been important to remain disciplined around digital and renewables in recent years, to ensure that you don’t inadvertently morph from a generalist to a specialist. There’s certainly no shortage of data centre and fibre-to-the-home opportunities right now.

The renewables space, however, is facing some challenges. Interest rate rises mean that developers’ cost of capital has gone up, and capex costs in general have increased significantly. In addition, in certain markets where power prices are depressed, such as Iberia, it’s now very difficult to justify building new solar.

By contrast, however, it’s still possible to generate attractive returns in markets such as France, the UK and Ireland. The situation is similarly nuanced when it comes to wind. We continue to view onshore wind in Germany as an attractive prospect, for example. However, the reduction in feed-in tariffs for off shore wind makes that market somewhat more challenging.

With respect to regulated infrastructure, meanwhile, there are ample opportunities across electricity, gas and water. There’s huge ongoing need for capex investment in electricity networks, whereas gas is more in runoff. Some therefore view gas as more attractive, because it involves taking less capex risk and more current yield. Certainly, the days of electricity networks as they appear on the Monopoly board – offering a 4-5 percent dividend – are long gone. It’s now necessary to write an equity check every year given the level of capex required.

Finally, UK water utilities are just emerging from a protracted period of underinvestment and so it’s probably a bit early to go back into that space. The level of investment in the coming five year period will be almost 80 percent higher than the last five years. But it will still take time to catch up from a period of neglect when regulators were solving for bill outcomes rather than the integrity of the networks.

“Privately held infrastructure is meant to be uncorrelated to public markets, but if generalists become heavily weighted towards data centres, how uncorrelated [can] those investments [be?]”

Q Where do you see the biggest challenges facing the infrastructure market in 2026?

The biggest challenge will be whatever happens on the global stage. The market feels as though it has regained some degree of normality, but recovery can be fragile. Any challenges that emerge in relation to the macroeconomic or geopolitical situation could be difficult for everyone. That then takes you back to a period where no one is willing to act – to commit to funds or to make new investments or disposals.

I would add that investors should also be wary about some of the unintended consequences of large managers morphing into specialists by deploying heavily in digital. Privately held infrastructure is meant to be uncorrelated to public markets, but if generalists become heavily weighted towards data centres – and North American AI data centres in particular – at a time when the so-called Magnificent Seven tech stocks represent around a third of the S&P 500, that raises questions around just how uncorrelated those investments truly are.

Is there a bubble building around AI? No one really knows. But if there is public market correction, that would have negative implications for the sizeable data centre positions held by the largest private infrastructure managers. This double impact is something that LPs may not have given a great deal of thought to, and goes against the premise of stability that infrastructure should bring.

Extract from Infrastructure Investor February 2026 magazine