Canada Pension Plan Investment Board (CPPIB) plans to increase its investments into private market assets in India, as it seeks to upscale its exposure to the country and other fast-growing emerging economies.
The $400.6 billion pension fund has boots on the ground in the form of a local office in Mumbai, the country’s financial centre. From there it is seeking to identify and partner with local players to invest into sectors such as ecommerce, which appear set to benefit from megatrends in the local economy.
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.
“We focus on emerging markets like India as an investment destination, and emerging markets will become a more meaningful part of CPPIB’s portfolio," Suyi Kim, senior managing director and head of Asia Pacific at CPPIB, told AsianInvestor. “We believe India will be a leading source of global growth in the [coming] decades, supported by positive demographics and a growing middle class.”
As of June 30, CPPIB’s investments across all asset classes in the country totalled C$9.9 billion ($7.5 billion). India represented 2.5% of the CPPIB’s total assets on the same date.
One of the pillars of CPPIB’s investment plan 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 June 30.
Kim declined to predict how much CPPIB could increase its India asset allocation by, explaining that the pension fund does not set specific targets per market and would not quantify a target AUM to reach in India in 2025. She also declined to comment on whether the pension fund would increase its resources in the country.
However, Kim hinted that CPPIB has large ambitions. “As our asset size continues to grow and our exposure to emerging markets increases, we expect India investments to grow multiple times.”
CPPIB began investing in Indian assets more than a decade ago. Over the past 10 years it has built up a portfolio comprised of large stakes in infrastructure, real estate and financial services; as well as a number of small co-investments alongside its partners.
Kim acknowledged that the portfolio took a while to grow at the beginning. CPPIB’s local investments really began to accelerate after it put professionals on the ground and opened the Mumbai office in 2015.
“An on-the-ground presence with strong local talent enhances our ability to source investment opportunities, build long-term relationships with key partners and manage our growing portfolio of investments,” she noted.
This has helped it make several private market investments to date. In December 2018 CPPIB invested into Byju’s, India’s largest tech-enabled education services provider, as part of its emphasis on the megatrend of increasing technology usage in the country.
Another megatrend is the country’s increasing need for infrastructure. On June 23 2014, CPPIB made a foray into India’s infrastructure sector was a $300 million investment in Larsen & Toubro IDPL, which owns the largest toll-road concession portfolio in India.
Additionally, in 2018 the pension fund invested into the first private infrastructure investment trust in India, known as IndInfravit Trust. Sponsored by L&T IDPL, IndInfravit initially acquired five operational toll roads in India and has since been exploring other toll road opportunities, such as the recently announced acquisition of nine of Sadbhav Infrastructures’ operational road projects from SIPL.
In May 2019, CPPIB signed a Memo of Understanding with Piramal Enterprises to establish a private Infrastructure Investment Trust (InvIt) that will focus on renewable power in India. The pension fund will hold up to a 60% stake, with an equity commitment targeted at $360 million when fully deployed.
The other anchor investor in the trust, German Allianz, has also shown increasing faith in India’s commercial real estate market.
CPPIB’s interest in India’s private markets has been emboldened by a set of fairly recent efforts to strength their legal framework. The Real Estate Regulatory Authority and the Insolvency and Bankruptcy Code were both introduced in 2016.
“Changes in regulation and increased government spending is areas such as digital infrastructure are key engines for growth and opportunity in India and continue to evolve and change the investment landscape,” Kim said.
Going forward, the pension fund aims to increasingly adopt a partnership approach as it builds its local private markets investments.
The pension fund is keen to find long-term local partners with which it has the potential and capacity to scale up investments with over multiple cycles.
The appeal of Indian investments is also down in large part to their good performance; the pension fund’s investments in the country returned 13.2% in CPPIB’s 2019 financial year, versus a general net investment return of 8.9% for its entire portfolio.
RETURNS TO FALL
Kim said CPPIB does not have predetermined return targets for India, as the pension fund looks at risk-adjusted returns by asset class on a global basis.
“We certainly watch short-term impacts and returns from local markets, but as a long-term investor, we are focused on the underlying fundamentals of a market and investment opportunities inherent in those,” she added.
Indeed, the most recent investment return is likely to prove an outlier in terms of levels of returns. Kim said CPPIB expects the India performance to gradually decrease as the market develops over time and draws in more capital and competition, increasing prices and reducing pricing inefficiencies.
“Private equity opportunities in India are benchmarked against similar prospective investments in other markets on a regional and global basis, and need to fit with our broader investment themes, as well as deliver a solid return.”