CPPIB grows principal credit team in Asia

Canada’s biggest pension fund is building out its leveraged finance team in the region as it strives for global diversification and growth in nascent markets.
CPPIB grows principal credit team in Asia

The Canada Pension Plan Investment Board (CPPIB) is bulking up its Asia Pacific principal credit investments team as a long-term play on the fast developing debt markets across the region, people familiar with the moves said.

The Toronto-headquartered investor has added two investment professionals to the Hong Kong-based team in the last year, bringing the total to five members. Globally the division comprises about 45 professionals, the people said.

Manjot Rana also relocated from CPPIB’s London office to Hong Kong as head of the team over a year ago. Previously, Rana has worked in leveraged finance at Barclays Capital and Citigroup in New York.

"Asia is an integral part of our global credit business and an area that is important for growth and diversification in the long run," John Graham, head of principal credit investments at CPPIB told FinanceAsia, a sister publication of AsianInvestor.

CPPIB invests Canada's biggest retirement fund, which has C$326.5 billion ($265 billion) of assets under management. At the end of CPPIB's last fiscal year on March 31, principal credit investments' assets totalled $16.8 billion, of which 5% was in the Asia Pacific region.

The long-term investor sees the relatively fast GDP growth in India and China, overlaid with relatively nascent credit markets, as a growth opportunity, according to people familiar with its thinking.

CPPIB is also looking to cement relationships with firms on the ground to jointly invest in credit markets.   

In March last year, CPPIB signed a joint venture with The Kotak Mahindra Group to invest $525 million in distressed assets in India. Together they are looking for bespoke financing solutions for companies, in addition to investing in distressed asset sales by banks.

"We're there to find partners we can invest in over the long term and participate in the growth," said CPPIB's Graham, who became head of the team globally last October.
Credit bonanza
CPPIB is not alone as it eyes the region’s credit markets.

Asset owners have been rapidly switching capital into private debt as a way to glean extra yield in a world where government bonds are offering next-to-nothing or even negative interest rates.

“It is the fastest growing area where we need to answer to our clients,” said Juan Delgado-Moreira, a managing director at Hamilton Lane, which advises investors allocating about $320 billion in private markets.

In credit Hamilton Lane has advised on $15 billion worth of credit investments and manages $4 billion itself. “The numbers have grown exponentially, much more than in buyouts, growth strategies,” said Delgado-Moreira during a panel discussion on credit at the Milken Institute Asia Summit 2017.

Two strategies dominate investors’ choices right now in debt: distressed debt and mezzanine. There is much less money in direct lending and special situations but these asset classes are the fastest growing choices among investors in credit said Delgado-Moreira.


Source: Preqin
Private Debt AUM Mix in Investors' Portfolios


Patient capital
CPPIB's principal credit investments team focuses on non-investment-grade corporate debt. It invests across the capital structure in everything from revolving loans, syndicated term loans, high-yield bonds to structured debt and bespoke private solutions for borrowers.

The Asia team is based in Hong Kong but has a pan-regional mandate including China, India, Southeast Asia and Australia. CPPIB has no plans to add more investment professionals in Hong Kong for now. 

"We're building a team and a competency in the region that we're taking a decade-long perspective on," CPPIB's Graham said.

Around the world CPPIB has people investing in credit in Toronto, New York, London and Hong Kong so it can analyse relative value in credit instruments on a global basis – CPPIB’s portfolio ebbs and flows between regions based on where CPPIB sees value at the time.  

In July CPPIB bought rights to a portion of future royalties in venetoclax, a cancer treatment drug, from Australia's Walter and Eliza Hall Institute of Medical Research. The transaction includes a cash payment of $250 million upfront and potential milestone payments up to $75 million.

"Australia, is an example of where there are increased opportunities," said CPPIB's Graham.

Royalties are becoming an increasingly popular choice among investors attracted by their stable, long-term cash flows which add diversification to their portfolios as performance is generally uncorrelated to that of the broader capital markets.

At CPPIB, investment in intellectual property rights sits within the principal credit investment group because the due diligence focuses on the sustainability and durability of cash flow – a very similar diligence process to credit.

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