India's increasingly institutionalised and transparent financial markets, and in particular its relatively new bankruptcy code, are beginning to offer distressed debt opportunities for investors that possess enough sophistication and and on-the-ground expertise to find them, according to a senior executive at the Canada Pension Plan Investment Board (CPPIB). 

On December 17 the C$409.5 billion ($308.3 billion) retirement fund announced a $225 million commitment to the India Resurgence Fund (IRF), a distressed asset investment platform. It reflects a big rise in interest in such assets among fund managers and asset owners in recent years. 

John Graham, global head of credit investments at CPPIB, said a key driver of the decision was the 2016 implementation of India's Insolvency and Bankruptcy Code (IBC). He believes the legal framework has already shown merits since its introduction.

But it has had its hiccups too, such as in the Essar Steel bankruptcy case last year, and some have said investors in Indian bad loans are in for a frustrating ride, given the challenges involved.

John Graham

Still, Graham told AsianInvestor, “while we believe the code will evolve over time, as it has over the last three years, we also believe it provides a strong foundation for an insolvency regime which is robust enough to manage down the materially elevated level of NPAs on bank and non-bank balance sheets”. 

He said that NPAs offer an investment opportunity for investors that can both structure and underwrite complex transactions. The potential for appealing returns could lead to other foreign investors seeking out the local market presence needed to find, maintain and monitor such transactions.

“This development in the market [foreign non-bank investors buying NPAs] will also be an effective solution for the banks as it would release capital which can then be used to fund new capital asset formation, generating future economic growth for the country,” Graham said.

Other asset owners have also praised the IBC for helping to improve India’s transparency and rule of law over distressed assets, among them the real estate investment arm of Allianz. The German insurer has contributed to the wave of capital chasing distressed and special situations opportunities in India over the past year or two, alongside asset owners such as the Abu Dhabi Investment Authority and asset managers like Cerberus, KKR and Varde Partners. 

RELATIVELY GOOD RETURNS

Graham did not specify the return targets for the IRF platform, but they are likely to be over 10%, given that CPPIB has already enjoyed attractive returns from its investments in India. The pension fund’s investments in the country returned 13.2% in its 2019 financial year, versus a general net investment return of 8.9% for the pension fund's entire portfolio.

“We view the Indian stressed and distressed opportunity through a global relative value framework, so without commenting specifically on expected performance we believe returns in the sector will be attractive when compared with risk-adjusted returns in similar sectors around the world,” Graham said.

Alternatives data provider Preqin said that global annualised returns for distressed debt funds were just above 6% for vehicles with one- or five-year horizons, while three-year horizon vehicles were above 10%, as of end-March 2019.

One of the pillars of CPPIB’s investment plan out to 2025 includes shifting up to one-third of its total AUM into emerging markets such as China, India and Latin America, according to its annual report for the 2019 financial year, which ended on March 31.

PARTNERSHIPS ARE KEY

The IRF was set up by Mumbai-based conglomerate Piramal Group and the credit arm of US asset manager Bain Capital. They also committed an initial $100 million each to IRF as joint sponsors.

The platform had earlier raised $100 million from the International Finance Corporation, the private-sector financing arm of the World Bank Group, through its distressed asset recovery programme. Graham declined to comment on whether CPPIB’s relatively large $225 million ticket would give the pension plan any control or major influence of the fund’s strategy, or offer it first serve on any potential sidecar investments.

The IRF setup follows CPPIB’s partnership strategy in alternative investments in India and other emerging markets. Spearheaded by its domestic office in Mumbai, the country’s financial centre, the Canadian pension plan is seeking to identify and partner with local players to invest in sectors such as e-commerce, which appear set to benefit from megatrends in the local economy.

“Strong partnerships are at the core of how we invest. A strong local operator with active oversight from a trusted global partner will allow us to further increase our investments in India for the long term,” Graham said.

India's gross domestic product grew at 6.98% in 2018 compared to the previous year, according to data from the World Bank. The country is projected to become the world’s most populous nation within the next decade.